Examination of Witnesses (Questions 1-19)
MR MERVYN
KING, MR
CHARLIE BEAN,
MR SPENCER
DALE, MS
KATE BARKER
AND PROFESSOR
DAVID MILES
15 SEPTEMBER 2009
Q1 Chairman: Governor, could I welcome
you and your colleagues to this Inflation Report hearing.
Would you like to introduce your colleagues and then proceed with
your opening statement?
Mr King: Thank
you very much, Chairman. Good morning to everyone. On my immediate
right is Charlie Bean, the Deputy Governor for Monetary Policy;
on his right is Kate Barker, one of the External Members of the
MPC; on my left is Spencer Dale, the Executive Director for Monetary
Policy and Analysis; and on his left Professor David Miles, one
of our other External Members. If I may, Chairman, a brief opening
statement. Following a precipitate fall in economic activity at
the end of last year and the start of this, there are now signs
that growth has resumed in the third quarter. Inflation over the
next year is likely to be volatile. But looking further ahead,
the strength and sustainability of the recovery is highly uncertain
and the balance of risks to inflation around the 2% target remains
on the downside. Money spending fell by over 4% in the year to
2009 Q2 and real activity fell by 5½%. Most of our major
trading partners have experienced similar falls in demand. But
both at home and abroad, there are now signs that activity is
picking up. The key question facing the Monetary Policy Committee
is whether this recovery will prove to be sufficiently strong
and sustained to keep inflation on track to meet our 2% target.
The consequences of the financial crisis, sparked by the failure
of the Lehman Brothers exactly a year ago today, will be pervasive
and long-lasting. That is not to say that growth cannot resume.
In some countries it already has, and in others it will. But there
is a long hard road ahead to restructure our financial sector.
Over a number of years, banks will be required to hold much larger
and more effective buffers of capital and liquid assets to make
the financial system less susceptible to the sort of panic that
occurred last year. Following a meeting of central bank governors
and heads of supervision in Basel last week, a clear direction
for the future of capital, leverage and liquidity requirements
was announced. At present, though, most financial institutions
around the world are focussed on recuperation, giving them a powerful
incentive to be cautious about extending new credit to households
and businesses. That is acting as a direct drag on demand. But
the crisis has also caused households and companies around the
world to want to strengthen their own financial positions and
that has acted as a further brake on spending. Those factors will
be important influences on the UK economy for the foreseeable
future. Nevertheless, the decline in activity has moderated and
growth seems set to resume. That is due to the combined effect
of three factors that are supporting a recovery: a slowing in
the pace of de-stocking, the lower level of sterling, and the
extraordinary monetary policy actions of the past year which have
acted to increase the supply of money by cutting Bank Rate to
0.5% and purchasing both public and private assets. To date the
Bank has purchased £147 billion pounds of assets. Six months
after launching the programme we are beginning to see its impact
on the supply of broad money and nominal spending. Despite the
more positive recent indicators, the falls in output that have
occurred over the past year have opened up a significant margin
of spare capacity in the economy. That spare capacity is bearing
down on inflationary pressure. Over the next six months though,
inflation is likely to be volatile, initially falling further
below the 2% target from its present level of 1.6% before rising
above the target. That volatility reflects base effects as well
as the reversal of last year's VAT cut. In the medium term, the
margin of spare capacity means that the risk is that inflation
will be below the 2% target. It was for that reason that, at its
August meeting, the MPC chose to inject further monetary stimulus
into the economy. In just the same way, it will be the outlook
for inflation that will guide when and how quickly the MPC raises
Bank Rate back towards more normal levels, and when and by how
much the assets purchased since March are sold. Chairman, I am
grateful for the opportunity to make these remarks. I and other
members of the MPC here today stand ready now to answer your questions.
Q2 Chairman: Thank you very much,
Governor. There has been a bit of debate in the press about the
recession and the pace it was coming out of recession in comparison
with France and Germany, which are out of it just now. Is the
UK slow in coming out of this recession; and why?
Mr King: No, I think the big picture
is that most of the developed economies are in the same boat,
with very sharp falls in output at the same order of magnitude
at the end of last year and the beginning of this. Those falls
in output have broadly come to an end and we are beginning to
see some very small signs of positive growth. I think it is important
to remember that the very small positive growth rates, or small
falls in output in other countries in the second and possibly
the third quarters, are really very small in comparison with the
sharp fall in output that took place at the end of last year and
the beginning of this. There is a long way to go before the level
of output gets back to where it was. And the quarterly figures
get revised. Even now you can see in the UK that the figures have
been revised once; they may well be revised again on the basis
of information that has been published; and where they will come
out in two or three years' time, when we get a more stable set
of data, no-one can really tell. I think the big picture is the
similarity of experience across the major developed economies.
Q3 Chairman: Has this recession thrown
up structural problems for the UK which need to be tightened at
some time in the future?
Mr King: I think the fact of the
severity of the recession certainly throws up two main sorts of
structural issues: one obviously is the impact on the public finances,
where the sharp fall in output, and hence incomes and tax revenues,
clearly put a dent into the public finances; and that means the
level of debt will be higher than would otherwise have been the
case; and then, looking further ahead, clearly the impact on investment—which
has been very sharp with big falls in business investment, some
of the biggest falls we have ever seen in business investment;
the rise in unemployment—means that this does pose questions
about how quickly we will be able to return to the sort of growth
rates of productive potential that we saw in the past. There is
a supply-side impact from the damage that has been done from the
financial crisis. I think those are the two main areas. Of course,
there is a whole question of reform of the structure of the banking
system itself.
Q4 Chairman: The G20 recently agreed
to maintain the fiscal stimulus. To what extent can the UK participate
in that? What slack do we have in that area?
Mr King: I think that everyone
now accepts that public finances need to be put in good order
and the timing of that depends on the state of the economy. I
think it is fair to say that the fiscal stimulus that the UK announced
was put into effect. There are some other countries that have
announced fiscal stimuli and have not actually implemented them
all yet. I think the G20 would be looking to those countries that
have announced their fiscal packages to implement them; the UK
has done that. We are now in a position of looking forward and
asking questions about: what is the appropriate timing of the
withdrawal of some of these measures?
Q5 Chairman: Has the G20 left anything
hanging? For example, I am thinking of the issue of banks too
big to fail and the macroprudential tools aspect. Is this an issue
which should concern us all, and perhaps the Committee keeping
an eye on this issue?
Mr King: Yes. I think the G20
stated good intentions, but it has not actually got to the point
yet where these things are being implemented. Clearly the G20,
reinforced by the meeting of the central bank governors and heads
of supervision, have stated clear intentions about where capital
and liquidity requirements should go—significant increases
in both capital and liquidity requirements. That is yet to be
implemented; clearly, it will need to be brought in over a number
of years rather than immediately; but the resting point—where
capital requirements will end up—does need to be stated
I think sooner rather than later. Even when that is done, I think
the two big questions that people have talked about that are unresolved
at present are: firstly, what shape and form macroprudential regulation
will take; and, secondly, how is it that countries believe they
will tackle the "too important to fail" issue. The idea
of leaving banks with implicit or, indeed explicit, state taxpayer-funded
guarantees which are then used to fund very risky trading strategies
is a very odd outcome; and that must be one that we need to tackle.
Q6 Chairman: Good. We will perhaps
come back to some of those points later on. Governor, I do not
suppose The New Statesman is part of the regular weekly
reading that is on your desk at Threadneedle Street, but maybe
this week it has to go on your desk. I put this point to you in
light of Professor Blanchflower's article and the critical picture
that it paints of your leadership. Do you accept that?
Mr King: Danny's recollection
of events does not coincide with mine. I am sorry that Danny has
chosen to comment in this way and I am not going to respond to
it. I do not think it is appropriate that I respond to that sort
of comment.
Q7 Chairman: Kate, he mentions you
as one of the "feeble six". How would you respond to
that?
Ms Barker: Like the Governor,
I regret that these comments were made. I have to say I too do
not have the same recollection of some of the events that were
portrayed in this article. He referred to me as one of the "feeble
six" in the context of the last vote, where he clearly considers
that we should have continued to do more quantitative easing.
I did not take that view. I did not take that view for the reason
that, looking at the way in which things were moving in the global
and UK economy, I thought that in order to keep inflation on target
we did not need to make quite such a big injection. It is difficult,
of course, to be absolutely precise about this. We are not yet
certain exactly what the impact of quantitative easing will be.
We are, I think, less certain about that than when we are using
the normal instrument of Bank Rate; but my judgment was that that
was what was required in order to keep inflation on track. I did
not regard it as a particularly feeble vote. Indeed, in the context
of the whole action that the MPC has taken since the crisis broke,
I think it is pretty difficult to describe any of us as "feeble".
Q8 Chairman: Deputy Governor Charlie
Bean, he mentions you as one of the "more plodding"
members of the MPC who has been "on the wrong side"
quite a lot of times?
Mr Bean: I have been called worse
in my professional career! Clearly, one can look back at lots
of decisions and think with hindsight one might have taken a different
view. I have to say, I am comfortable with most of the decisions
that I have made in my time on the Committee given what I knew
at the time. I think he particularly mentioned the August 2005
cut which I supported, although the Governor did not—so
the suggestion that he has an "iron fist" that forces
everybody into line I think is exposed by that particular event.
Clearly, in retrospect, given what happened it looks like that
cut was unnecessary. I do not think it caused any great difficulty.
People who suggest that that cut led to the explosion in house
prices and the credit boom frankly I think need their head examined.
Q9 Chairman: Governor, I think maybe
one of the more potentially damaging points he makes is that he
says the MPC has "group think". What can you say to
reassure us that that is not the case?
Mr King: I think if you look at
the voting record of the Monetary Policy Committee there is no
such committee in the world which does not have more explicit
and open different votes for different levels of interest rates.
We are not voting for and against each other. We are simply saying
our judgment at the end of the discussion is that I as an individual
prefer this policy action, and someone else prefers a different
one. Most of our decisions have ended up being split votes. That
I think surely has to be the explanation, because individuals
have to come before you: you can ask people why they voted that
way and they have to explain. I find it very hard to see how that
decision-making process could be regarded as "group think".
Q10 Chairman: Lastly, Governor, Professor
Blanchflower makes a point that you were voting in the minority
but you cannot afford to continue to vote in the minority because
your credibility would be threatened. Could you answer that point?
Mr King: I shall vote for what
I think is the right thing to do month in, month out. I have always
done that and I will go on doing that. I would not stay in the
job if I felt I could not do that.
Q11 Mr Tyrie: I would just like to
pursue a couple of the points that have been made in the last
few minutes. It seems to me that the Blanchflower piece is something
that it is a duty of this Committee to take a look carefully at,
and not something we can ignore. I was disappointed when you said
initially, Governor, you decided not to respond. As it happens,
I think the piece is confused and contradictory in places; but
nonetheless it is important that we take a look at it. I would
just like to ask you—and one of the key points he makes
is that the UK economy would be "in much better shape"
if his advice had been followed and we had had nine months of
lower rates earlier—whether you think that is the case;
or whether you think, as Charlie Bean does, that these relatively
marginal decisions are unlikely to have dramatic effects on the
economy?
Mr King: I am very happy to answer
questions from you which are factual questions about how the Committee
works or the state of the economy; it is that article I am not
going to respond to. You have asked a question and I shall answer
it. I do not think that the level of interest rates which Professor
Blanchflower was voting for, which was marginally below that of
other members of the Committee, would have made a dramatic difference.
There was a slowing of the economy in 2008. We said right through
that year we wanted a slowing in the economy; we were deliberately
trying to engineer a slowing in the economy to remove some of
the inflationary pressure which led inflation to rise to 5.2%.
Indeed, I remember coming before this Committee last year and
being asked: "Have you lost credibility in your ability to
control inflation?" I think the extraordinary loss of confidence
around the world, not just in the UK or the US but around the
world, which led to this dramatic fall in spending in a highly
synchronised way—I cannot think of any recession ever which
has been as synchronised as the fall in spending and output that
took place in the final quarter of last year and the first quarter
of this—resulted from the events of last year, and would
not have been affected by marginal changes in Bank Rate earlier
in 2008. But that is my view.
Q12 Mr Tyrie: To summarise on that
question, your position is that with the advantage of hindsight
perhaps the MPC could have done slightly better, but the idea
that this would have a dramatic effect in changing where we are
is misplaced?
Mr King: If we all had hindsight
then I do not think the crash would have occurred! You cannot
set policy with hindsight. There does not seem to be much point
discussing how policy should have been set with hindsight, since
it can never be done.
Q13 Mr Tyrie: I agree. Turning to
the specific criticisms and their relevance for how we go forward,
do you think that the MPC is configured correctly? For example,
is the correct advice getting through to the external members
of the MPC? Has this been raised with you since the Willem Buiter
row about this all those years ago which led to the appointment
of assistants? Does it continue to be a source of concern?
Mr King: No. You have asked members
of the Committee, and asked people here today, that we have significantly
increased the resources which are available to external members.
There is no information on the economy that is available to the
Executive that is not available to external members. Papers sent
round by Bank staff and others are copied automatically to every
member of the Committee.
Q14 Mr Tyrie: You have been accused
of "group think" and that you have dominated this Committee
with an "iron fist": do you think increasing the number
of externals to five, at the expense of one of the internals,
might do something to assuage that concern?
Mr King: No, because I think you
can form your own judgment as to whether I do or do not have this
so-called "iron fist"; but surely the voting record
is absolutely clear on that point. I have been content to be in
a minority on three occasions. I do not feel this has affected
my ability to lead the Committee. That is what I have been asked
to do as Governor and will go on doing it. To be a committee of
the Bank, it is very hard to see how it could be a committee of
the Bank if it is actually a committee that is outside the Bank.
Q15 Mr Tyrie: What about his criticism
that there are too many "mathematical modellers" in
the Bank of England; the same criticism that is being made of
private banks?
Mr King: We do not use mathematical
modellers to either price financial instruments in the way that
was done in the trading activities. What we do is to hire good
economists who can provide us with information, which I can assure
you comes to the Committee not in the form of equations but in
the form of words and numbers about what is happening in the economy,
so the Committee can make its own judgment. We have always said
that we are certainly not setting policy on the basis of one or
more models. We are setting policy on the basis of our own judgment.
But when you are dealing with a system in which it is important
to ensure that your view about what is happening to consumer spending
is consistent with what is happening to incomes and the exchange
rate, then actually it helps to use models to ensure that your
judgment is a consistent whole, or to challenge the judgments
that we are reaching, and that is what the staff do. I think we
have exactly the right team of people to do it. We have a vast
amount of information. Remember, we have now over 8,000 businesses
around the United Kingdom that report directly and exclusively
to the Bank of England on a regular basis through our Agents,
and that information is made available to the Committee; and I
and other members of the Committee make regular monthly visits
outside London to meet with businesses and find out what is going
on on the ground. I think we are absolutely in touch with what
is happening in the economy; and I think we have the right framework
and information base to make decisions.
Q16 Mr Tyrie: Where specifically
is Professor Blanchflower's recollection wrong?
Mr King: There are judgments there
about how decisions were reached, about particular interest rate
decisions which do not coincide with my recollections. I am not
going to respond to it. He has chosen to make a statement of this
kind. He is entitled to do that. I think it was unwise and not
sensible for someone on the Committee to do it; and I am not going
to get involved in a discussion on that basis.
Ms Barker: You asked a question
about whether or not the externals had sufficient information—I
was going to remark that the one thing I have not felt short of
while I have been on the MPC has been in the quantity of information
that we have received. We are very well supported by the Bank.
I have never asked any question to which I have not received a
prompt and thorough answer, and I have my own staff to pursue
the questions I ask. More specifically, I wanted to say that for
quite a long time we have also, as externals, been receiving really
excellent information about the financial system directly from
FS, which I have been extremely grateful for. Shortage of information
is not my problem.
Q17 Chairman: Just one point. If
I remember that article, Professor Blanchflower said he was sitting
in America during the Northern Rock crisis and never received
a telephone call?
Ms Barker: I cannot comment on
what he received.
Q18 Chairman: What did you get?
Ms Barker: I think it is absolutely
reasonable to say that in absolute crisis periods, because of
course we were not meeting in those crisis periods, I would not
have expected members of the Bank, who had other things to do,
to be spending their time talking to me. Around the meetings we
always received the briefing that was necessary, frequently from
the Governor himself.
Q19 Chairman: Did you feel that you
were getting sufficient information as an external member during
the Northern Rock crisis that you were able to acquit yourself
if anyone asked what was happening in the Bank of England and
what you were doing?
Ms Barker: I think it is perhaps
true that at the beginning of the crisis we did not quite have
enough—and I do not think it was due to anybody's lack of
thought; it was simply due to the fact that it was a crisis—but
when I asked questions and sought information I always received
it.
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