Examination of Witnesses (Questions 440-453)|
MP, MR NICK
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
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. 
Chairman: We will digest those at leisure,
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
Chairman: Thank you, Chancellor, and
we hope to produce our report in July for consideration.
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