Examination of witnesses (Questions 293-299)|
TUESDAY 27 FEBRUARY 2001
293. Welcome. Would you like to introduce your
(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
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.