Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 440-453)

RT HON GORDON BROWN MP, MR NICK MACPHERSON AND MR JOHN RAMSDEN

14 JUNE 2007

  Q440  Mr Mudie: Are the Canadian and American economies not modern economies? They have a dual mandate.

  Mr Brown: Yes. If I am right, in America the mandate was written many decades ago. I may be wrong about that. I am not sure about the Canadian economy.

  Q441  Mr Mudie: We were there a couple of months back and I can assure you they are. Why do they accept it as modern and you do not?

  Mr Brown: I do not think the results are so different in America and Canada from the United Kingdom.

  Q442  Mr Mudie: So you could change it.

  Mr Brown: I think what we are doing is reflecting a modern understanding of how the economy works, that there is no trade-off in the long term. There may be a short term trade-off but there is no long term trade-off that is worth emphasising in any way between inflation and employment.

  Q443  Mr Mudie: You have indicated some changes to the membership selection but have you given any thought to whether you need to set an annual target for inflation? Canada is at 5%. There is a difference between 5% and 1%.

  Mr Brown: We set an annual target in the Budget, and we have not changed that target.

  Q444  Mr Mudie: I know.

  Mr Brown: It has been based on RPI previously and now CPI, but in effect the target has not changed for 10 years. Personally, I feel that the stability of having the same target is the right course of action.

  Q445  Mr Mudie: Have you ever thought about it, Chancellor? Your answer suggests you are going through the arguments as you speak.

  Mr Brown: You are very kind and generous in your—

  Q446  Mr Mudie: I have always been kind and generous.

  Mr Brown: When we moved from RPI to CPI we moved from an RPI of 2.5% to a CPI of 2%. Obviously, at that point we considered whether we wanted a target that was tougher or a target that was less tough. We decided we wanted a target that was as tough and in fact this target is a little tougher in my view, and I thought that was the right thing to do at that point in time, so we did have that debate and I think it is right where possible to hold to a target that is working rather than make changes. I have just been given all the figures about the inflation performance of different countries in answer to previous questions, and I think the best thing is that I send them to the Committee. Spain peaked at 4.2%, Greece 3.9%, France 2.4%, the EU 27 at 2.6%, and 2.6% was the peak in 2006, so I am happy to send all these figures to you. [1]

  Chairman: We will digest those at leisure, Chancellor.

  Q447  John Thurso: Chancellor, can I just say that the independence of the Bank and the MPC has clearly been a great success, which pleases me as the manifesto I supported in 1997 included the proposition, but I think there is, as you have said, room for some improvement. In your opening remarks you talked about the four propositions, the third one of which mentioned market credibility. In this regard we have had quite a lot of evidence of a lively academic debate that is going on around how much information the Bank should provide on the future path of interest rates. What is your view on whether the Bank should provide dire statements or forecasts of the future path of interest rates?

  Mr Brown: What the Bank has done, which you would probably say is not sufficient, has been both adequate and probably in line with what people would expect of it, so I would not be proposing a change but it would be a matter for the Bank. There is no prescription or prohibition on the Bank for being far more predictive, if you like, in what it wants to say to the public in its inflation report.

  Q448  John Thurso: Do you think in the future the path of interest rates would give any better insight or help government departments, for example, including the Debt Management Office, in the planning of their activities?

  Mr Brown: I think it would help only to this point, that I have said there are three big factors operating on inflation at the moment and therefore we cannot predict what is going to happen to oil and commodity prices. That has been the major impact on inflation over these last two or three years. In the period I have been Chancellor oil prices have been $11 a barrel at their lowest and I think $77 at their peak, and so this is the volatility of the oil market. The commodity market has been equally volatile. Nobody would have thought in 1997 that the Chinese or the Asian effect on consumer prices would have been as big as it has been and nobody can be absolutely sure what the effect of this will be with changing Chinese labour prices and so on over the next 10 years.

  Q449  John Thurso: Do you see that as a bigger threat than oil prices?

  Mr Brown: No, I do not see it as a bigger threat than oil prices because I believe that the Chinese growth will almost certainly continue and I believe there are other countries able to compete as well, and therefore you are seeing the evolution of the global economy, but when you have that level of volatility, no matter what the Bank or others do to predict the course of interest rates it is bound to be affected by what has happened. Your only way would be to do what the Australians do, and that is to exclude some of these external factors from their calculations about the inflation target, but that is not something that we have done.

  Q450  Chairman: Chancellor, whilst in Canada we heard evidence that eight meetings, one for each forecast and a meeting in between each forecast, worked well. It was suggested that that would allow thinking time for both MPC members and the Bank. If you were writing the legislation for an independent Bank of England now would you again include a requirement for the MPC to hold a meeting every month, 12 times a year, in other words?

  Mr Brown: I think we should continue with what we have got. Obviously, the context in which regular meetings were held about monetary policy, even before there was devolution of this to the Bank of England, was the fast-changing situations in the seventies and eighties which meant that interest rate decisions were sometimes being made on two or three occasions in every month, so people came to the view that you should have regular meetings. That is not what is happening now and you could probably afford to make a change but I think the pattern we have is pretty well established. Professor Blanchflower, I gather, told the Committee that reducing the number of meetings would risk the MPC being perceived as asleep at the wheel, so you have to balance the suggestion of inactivity with the need to have a stable set of meetings.

  Q451  Chairman: Maybe that was to help his air miles.

  Mr Brown: I think the Committee should be more generous to him than that.

  Q452  Chairman: Chancellor, we look forward to welcoming back Mr Macpherson to the Committee but he will be on his own in future, I believe, because you, Mr Cunliffe and Mr Ramsden are going to new jobs. Whatever new jobs you go to can we wish you well as a Committee? You have made 31 appearances before this Committee and your officials have been extremely generous and courteous in their dealings, so can we thank you all and, as I say, wish you every success for the future?

  Mr Brown: Thank you very much, Chairman. When you say 31 appearances it sounds like someone coming before a court.

  Q453  Mr Fallon: It is!

  Mr Brown: I will send the information about the inflation figures directly to you, the comparisons with all the other continents about what has been happening over recent years, and I am very happy, because of the shortness of the time we have had today, to answer in writing questions that you have put to us but we perhaps have not been able to go into as much detail on as normally. I thank the Committee for understanding that this had of necessity, given the date, to be a shorter session than previously. Could I say that despite all the ups and downs of appearances before this Committee I have enjoyed it very much. I think it is a very important part of the political and democratic process and I commend the Committee on the work it does, not only in this area but in so many areas, which is important for the health of both our economy and our democracy, so thank you very much.

  Chairman: Thank you, Chancellor, and we hope to produce our report in July for consideration.





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