Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 293-299)




  293. Welcome. Would you like to introduce your team?
  (Sir Edward George) Yes. I think you probably know them all, Chairman.

  294. Just from the point of view of the record.
  (Sir Edward George) On my far right is DeAnne Julius, Ian Plenderleith is next to the end, Mervyn King is the Deputy Governor, Charlie Bean, who you know extremely well, and Steve Nickell on my far left.

  295. I might start off, if I may, Governor, by asking you why you decided to cut rates this month and why you did not cut rates in January? What was the difference?

  (Sir Edward George) I think, of course, you know that this month was the Inflation Report month, which is the month in which we really bring a lot more of the analysis to bear in producing the inflation forecast. The uncertainties were quite considerable as to where we would be. Quite a lot was happening in the January period, and so the majority of the Committee reached the conclusion that it would actually be sensible to wait until we got this more comprehensive picture through the Inflation Report.

  296. So that was why you did not cut in January, but you have not told us why you cut the rates in February.
  (Sir Edward George) Because when we looked at the analysis, though we saw the domestic situation as generally relatively stable, we had the uncertainty arising from the global situation and the forecast suggested from a centre of gravity point of view, that we would undershoot the target, so we cut rates in order to address that prospect.

  297. May I ask, Dr DeAnne Julius, you were one of those who voted for a cut in January. Am I right?
  (Dr Julius) Yes.

  298. Why did you do that? We have just heard the reason why the majority did not vote for a cut in January, why did you vote for a cut?
  (Dr Julius) I voted for a cut in December, January and February, and I suppose the key differences were, on the international front, I was perhaps a little more worried than some of my colleagues about the abrupt slow-down in the United States and what that meant for this economy as well as the European countries that we trade with. On the domestic front, I am perhaps, a little more optimistic about the supply side improvements that we have seen in this country, although the rise is not as far as one might like but it is starting to rise. Then there is the slow growth in unit labour costs and the evidence from the labour market that the average earnings rate did not seem to be rising dangerously, despite a very different tight market. So it was really a combination of factors, both on the international front and on the domestic front. Then the third element in my own thinking is that we have been lower than the inflation target for quite some time. I think this must cause one to wonder why that is and why we have been able to grow at a slightly faster rate than forecast yet have inflation somewhat lower than forecast. To my mind the most logical explanation for that is this improvement in the supply side performance.

  299. I wonder if I could just ask Professor Nickell, because he is a well-known labour market expert. He does not appear to share your view. Well, he did in February, but up until then he had not been in favour of a cut in rates.
  (Professor Nickell) Correct.

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Prepared 28 March 2001