Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 400-419)




  400. Should you name the individuals in the minutes? You do not at the moment.
  (Sir Edward George) I would regret that, Chairman, and the reason that I do that is that, as DeAnne Julius said, there are parts of individuals in different paragraphs and it is really the substance of the difference which I think is important to convey and that is what we try to convey in the minutes. If you name individuals or, as I think in other places suggested, you have individuals writing their own paragraph in the minutes; other people have suggested they even produce their own forecast in the minutes, I think there is a real danger that you do get into a situation where the individual, the personality, impedes what I believe is a very well working process.

  401. You lose the collective?
  (Sir Edward George) Yes. You would focus the thing on personalities rather than on the elements in the debate.

Mr Cousins

  402. Dr Julius, do you think, looking back over the last immediate period of time, the last six months, that the policy has been set too tight?
  (Dr Julius) I voted with the majority most of that period. It was only in December that I personally began to feel that it was time to loosen it.

  403. In December?
  (Dr Julius) Yes.

  404. Do any other members of the Committee feel that, obviously with the judgment of hindsight because they may not have supported that position in December, they too feel that it would have been wiser to have set a looser policy in December? Mr Plenderleith?
  (Mr Plenderleith) No, obviously not, because I voted not to do so in December.

  405. We are in Parliament. It is perfectly possible to look back on a vote and say, "You got it wrong".
  (Mr Plenderleith) I think by February it is very difficult to make a hindsight judgment on a position taken only two months ago because the evidence is clearly not available to assess that fully. If I could make a point relevant to that, these are quite fine judgments and you yourself raised the question whether there was a growing division in the Committee between one set of views rather than another. My own feeling is that there are degrees of views about the appropriate decision each time and the balance of votes, if you like, spread around that shifts from time to time, so that many of us can share areas where our views are common but also give greater weight to some aspects than others will do. In terms of the two paragraphs that you were describing in the last set of minutes, just as DeAnne Julius said that she was in both paragraphs but probably finishes up in paragraph 34, I too am in both those paragraphs but finish up in paragraph 33. We overlap there, if that is not becoming improper. The question then of whether one would be right or wrong at a meeting is very much a question of the balance of views one had at that particular time and whether that balance should have been slightly different. It is rather hard to make that particular judgment, particularly after two months.

  406. But you do see the possibility, do you not, that if these differences become systematic over a period of time, and if they are always identified with the same individuals, then you do have two camps, two parties?
  (Mr Plenderleith) The point I was trying to make was that I do not believe that they are becoming systematic. Whether they are associated with the same individuals is a matter of fact but I do not think there is any bias in the Committee to polarise like that. What I do think is that there are differences of viewpoint each time, which may be different members of the Committee and which may lead to a different centre of gravity each time. I think that is enormously healthy. Through last year the Committee held to unchanged rates but at a number of times during the course of last year there was some tendency for the Committee to veer towards voting more for an increase in some cases, so that it was unchanged but with a tendency to look towards the scope for raising rates. As the year progressed the Committee was unchanged in its result with a tendency to look towards lowering rates. I think that is exactly typical of the centre of gravity shifting backwards and forwards across the Committee. I think that is the important dynamic in it, not the views of individuals coming at it from any set direction.

  407. Governor, do you think this difference of views will make it easier or more difficult to read the real effects of the American economy on the British economy over the next six months?
  (Sir Edward George) There are two dimensions to it. One is the behaviour of the US economy itself. There is secondly the dimension of the impact, for whatever happens to the US economy, on the United Kingdom economy. The fact that those dimensions have been drawn out in our discussion means that we will be paying more attention to the evidence, which would indicate that the impact of whatever happens in the United States will be greater or less, and that we will be doing between now and the next forecasting round. It is one of the issues that emerged from our forecast debate this time which we will be looking into before the next forecasting round.

Mr Davey

  408. Governor, I want to go further on this point. I am worried even though basically it is a presentational point and basically you are doing a very good job and I am glad you are not standing for election. I think this presentational point is quite significant. You have got an inflation target and you have got inflation forecasts in order to meet that future target. How you present that forecast to the financial markets and to other economic agents is obviously very significant. You have chosen to do it with this collective judgment/centre of gravity you called it/balance of risk type of approach, bringing out the differences in the minutes in table 6B. That is the approach you have taken. Other commentators, both former MPC members (I am thinking of Professor Charles Goodhart) and Don Kohn, another central banker from abroad, have put forward alternative views of how you could go about this presentational issue, different models. I really want to ask your views on those because you have in many ways adopted this presentational model from history. It has been bequeathed to you a little bit and on the Committee you have gone around trying to pull people together. But there are other approaches that people have taken and I am wondering whether you and your Committee have discussed having a different presentational approach.
  (Sir Edward George) I think we are talking basically about the production of the forecast and the ownership of the forecast here, which is a different thing from Mr Cousins' point. It is true: Don Kohn identified five possibilities. I think his conclusion was that he could see the disadvantages in all of them and that what we were doing was probably quite a sensible approach. It is not what they did in the United States. They have a staff forecast. There are pros and cons. A staff forecast would be a great deal easier to produce because you would have somebody in charge of the staff who would tell them what the assumptions were. It would in my view be very much less productive in terms of the Committee because part of the process of debating what the key assumptions should be is absolutely vital, I think, to our whole process. It would also have the disadvantage that if the members of the Committee chose to do so they could simply say, "That is very interesting", put it on one side and then operate on their own thing, and I think we would find it much more difficult then to focus our debate on key questions. I can go through all of those pros and cons. Don Kohn does not come out in favour of any of them. He said you must keep it under review.


  409. He has just been in front of us and he said that basically he was in favour of four and five and he thinks you do a mixture between four and five.
  (Sir Edward George) You have the advantage of having heard him yesterday. I am afraid I did not and I shall be very interested to see what he said yesterday. Certainly when we were discussing this he did not have a view about that and I do not think in his report he came to a conclusion on that.

  410. No, he did not.
  (Sir Edward George) Charles Goodhart has said that it should be the Governor's forecast. It is jolly nice for Charles Goodhart but I have to tell you that if I were to make the forecast I would have two options. One would be to do precisely what we do now, which is for me to chair the discussion of the Committee in order to assess where the weight of the Committee view is and to reach the centre of gravity in that sense. The alternative would be to behave as the head of the monetary analysis people would do and tell them what assumptions to make. I would suffer in the same way that the Committee would in that case say, "That is jolly interesting. We make different assumptions", and so you would not advance. It is not an easy or straightforward question.

Mr Davey

  411. I recognise that, Governor, but in Charles Goodhart's paper he puts forward arguments about why his approach would be better than the current one. He says that it would simplify presentation, presumably to the markets, and that it would simplify clarity.
  (Sir Edward George) It would not at all.

  412. This is his argument.
  (Sir Edward George) I fundamentally disagree with Charles Goodhart because I think he just ignores the point that I would either have to do it as we do now but then label it "The Governor's Forecast"—what I do now is, when we have differences of view about precisely what assumption to make, I do ask everybody for their opinion and we take a judgment based upon the centre of gravity of those views for each of the individual bits. We then look at the outcome to see whether the whole is still consistent with the general opinion of the Committee. There are some outliers and those are identified in Table 6B. I would either have to do that, but if I did the same thing it certainly would not be easier to explain to the general public, or I would have to do it by saying, "I hear what you say. This is what I now decide", in which case it would not be the same thing at all and it would suffer just as the staff forecast would suffer because people would say, "It does not influence our view on where the policy judgment should come".

  413. But again, going back to his paper, another advantage he puts forward for this view is that it would clarify responsibility, that there would be much clearer ownership of that forecast.
  (Sir Edward George) I have just explained to you I do not think it would because actually what I would do—

  414. It would be your decision.
  (Sir Edward George)—is precisely now what we do in order to try to arrive at a centre of gravity of the Committee.

  415. But it would be a Governor's forecast, not a Committee forecast.
  (Sir Edward George) I do not think a Governor's forecast would be worth anything. It would certainly be worth no more than a staff forecast in terms of its impact on the policy. We can discuss particular ideas. There are hundreds of ideas about these things. I just do not happen to think Charles Goodhart's is a particularly good one.

  416. Could I then go back to how you are currently doing it and table 6B, which is where you bring out these tensions? In the forecast you have got the new economy stuff and the impact of the US slowdown. You specifically put those out. In a very interesting phrase at the bottom of page 67 you say that major differences in their preferred alternative assumptions are calibrated in table 6B, but there are also small differences with respect to other assumptions, and that as a result some Committee members considered that a profile for inflation at a two-year horizon could be up to one and a half percentage points lower. Could you explain first of all the small differences with respect to other assumptions, what that refers to, and, secondly, whether you think a half per cent difference is significant?
  (Sir Edward George) I am not sure I can actually remember the precise details of the particular assumptions, maybe Mervyn or Charlie can or some of the other members here. Again, there are always point one or something differences on what you should assume about this or that and we are simply saying that, yes, there are but the key ones are the ones that we identify in Table 6.B. Do you remember any of the others, Mervyn?
  (Mr King) The key thing to understand here is that following Don Kohn's visit we did change our procedures. Previously we had tried to go through a process under which the Committee as a whole agreed every single forecasting assumption: that is not a very productive way to operate. What we agreed was that we would allow the staff to put before us a bench mark forecast which incorporated their adjustments to the data that had come in since the previous forecast round and we, the Committee, then decided what were the three or four really big issues that were going to determine the shape of the forecast profile. We spend our time discussing the big questions and not getting bogged down by tiny things which might make a difference of 0.05 percentage points, it is not worth our time doing that. Hence, the differences of view on Table 6.B are restricted to differences about those big questions. There may also be a whole host of minor things which for some members of the Committee may add up to something and if it does then they express that in their view about the overall shape of the projection. What the sentence here does is to say that taking all views into account, all possible assumptions, the view of members of the Committee is that some members of the Committee have a central projection at the two year horizon which could be up to half a per cent lower than in the central projection. So there a few small things that add up to more than would be in Table 6.B but they are not things that we spend time in the Committee discussing, it is not sensible to do so. What really matters is discussing the big questions: what is going on in the labour market, what is happening in the US? Those are the big questions that we spend our time on and that is where the differences really matter, where there are no simple judgments and where it is important that members of the Committee say "well, in my view maybe the risks in the US are much bigger than some of my colleagues around the table and I would like to see that reflected in the overall projection that is made". It is those things that the Committee spends its time on. Hence, you cannot get all the information without differences of view on where the central projection lies entirely from Table 6.B. I would repeat what I said earlier which is one of the drawbacks to Table 6.B and all of this discussion is that it is putting far too much focus on the central projection. What influences us is the balance of risks around that central projection and there are differences of view about the balance of risks, so please do not focus solely on differences with respect to the central projection.
  (Sir Edward George) You ask is half a per cent significant, it is well within the range of uncertainty.

  417. I find those answers very helpful, I am sure that people listening will have done. Can I just ask you one final question before others come in. Would you have any intention of reviewing how you present the forecast and the differing views on the forecast in the future? Will you actually review it in, say, six months' time and discuss as a Committee would it be a better thing if we chose one of these other presentational models?
  (Sir Edward George) We have a constant process whereby we explore whether we think we have got a better mousetrap. I do not know whether we will do that in six months' time but if there is a mood on the Committee to actually think that this might be a better way then we will have a meeting of the Committee and we will discuss it.

  418. Thank you.
  (Sir Edward George) That was the main recommendation of Don Kohn's original report, that we should be open to evolution, and I am absolutely committed to that.


  419. As you know, we are looking at the performance of the Committee since it was set up. Do you think that you have done well? Do you think that you have made any mistakes? I am going to ask not just you, Governor, but other members of the Committee as well.
  (Sir Edward George) Then I can simply say yes and no.

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