Examination of witnesses (Questions 420-430)|
TUESDAY 27 FEBRUARY 2001
420. I am going to ask Mr Charles Bean because
I can remember when he was our adviser that there were times when
he thought that maybe you had not got it entirely right.
(Mr Bean) Of course, I do not take any responsibility
for the errors! I think with hindsight you can take the view given
that inflation now is turning out a little bit below target and
say that indicates maybe at some earlier stage it would have been
desirable if interest rates had been a bit lower. But that, of
course, is with hindsight. The key, as I emphasised to you in
my earlier incarnation, is that it is not judging just the outturns
vis a" vis the target, but the question is were they
reasonable decisions at the time. I think by and large the decisions
the Committee has taken since it was formed in 1997 were pretty
much the right decisions given the information that was available
at the time. One can quibble maybe about a quarter of a point
here or there, about maybe a rate change that might have happened
a month earlier or a month later or something like that, but they
were really very
421. Or maybe there was a particular rate change.
Was it in 1998 on the basis of the earnings figures which may
possibly have been
(Mr Bean) That is a good example of the importance
of taking into account the information that was available. Clearly
on the information that was available to the Committee at the
time, which included what turned out to be a somewhat erroneous
signal from the average earnings index, it was perfectly understandable
why that decision was taken. I do remember as an adviser at the
time saying to you that maybe there was a case for not responding
to that, because it was not clear that it fitted with all of the
other bits of information. But it was not clearly an erroneous
decision given the information that the Committee had available.
422. Dr Julius, could I ask you the same question.
Do you think you have done well and have you made any mistakes?
(Dr Julius) I think we have done pretty well judging
by the economic history of this country.
423. You are worth your salaries then?
(Dr Julius) That is for others to say. I think we
have stayed remarkably close to target. I think that we have had
some shocks during this period. The Asian crisis was not something
that we anticipated and I think the oil price rise was not something
that we anticipated, so I think we have been stress tested to
some degree during this period and inflation has been fairly close
to target. If one was to think about the period of the Committee
when the outturn on inflation is actually something that can be
attributed to our own decisions, and that really means the last
couple of years because initially the outturn on inflation was
probably the implications of previous decisions before we were
set up, there is certainly evidence that we have been consistently
below the target and that is something I think we are all aware
of but we need to really understand the reasons for that, to make
sure that we are not building in any persistent undershooting
of the target.
424. Any other views?
(Mr King) If you look at the broad movements in interest
rates, what the Committee has done in its history is first to
raise interest rates from six per cent to 7.5 per cent and then
following the problems in the world economy, following the Russian
default and devaluation and the collapse of LTCM, we cut rates
from 7.5 per cent to five per cent, and then as the world economy
recovered raised them from five per cent to six per cent and left
them unchanged for a year until the last meeting. Every member
who served on the Committee during that period was in favour of
that broad pattern of movements. There were only four occasions
out of 45 meetings when the differences of view were bigger than
25 basis points. I think the outturns show that that broad pattern
of first of all raising rates and then cutting them sharply in
response to events following Russia and LTCM and then pre-emptively
raising them and then holding them constant has all turned out
pretty well. The most important thing to say is the differences
on the Committee around that have been absolutely tiny. The average
differences between members can be measured in small numbers of
basis points. They are much less than a quarter per cent. There
was broad unanimity on the Committee of everyone who served on
it during that period and these patterns of interest rates I think
have served the economy well.
(Professor Nickell) Since I have only been on the
Committee since June perhaps I could talk a little bit more about
the broad history. Since late 1992 when the inflation target started
there seems to have been absolutely no question that the British
economy has been relatively stable and has performed relatively
well. One might want to argue that "oh, well, the world has
been a much nicer place", but the fact is even if one intends
to control for that by looking at how well the British economy
has done relative to the rest of the G7, say, over that period,
the fact is that the British economy has done better relative
to the G7 on the inflation and unemployment fronts than was the
case for the previous 15 years. There seems to be no question
that the general structure of monetary policy based on inflation
targeting, of which the MPC is a refinement, is a good structure.
I think that the idea that you have a bunch of people who spend
a lot of their time just focusing on what is going on in the world
and what they think is going to happen and then making judgments
on the basis of that, which while one can argue at a quarter point
here and there seem to be broadly sensible, is something which
enables the actors in the economy to have some trust in what is
going on, which is expressed in what they feel is going to happen
to inflation in the longer term. That is a huge benefit to the
economy. The fact that the actors in the economy think that whatever
happens in the short-term, inflation in the longer term is going
to settle down to around 2.5 is an extremely valuable thing which
helps the British economy no end.
Chairman: Thank you very much.
425. This really follows on from that. I think
the Governor explained that in December there was an undershoot
of the target and you largely explained that by the unexpected
strength in sterling. Is that not the case?
(Sir Edward George) That has certainly been a factor.
I think the question is did we make mistakes? There were certainly
things we did not foresee and that was one of them.
426. There has been some speculation in the
press that particularly if the Chancellor decides not to index
various indirect taxes that we could see inflation going below
the 1.5 per cent mark and we have already heard today about you
being relatively happy and relaxed about writing letters. Do you
think there is a problem in this area with having a symmetric
target, that it creates some difficulties for you, or are you
quite relaxed about that framework?
(Sir Edward George) I am very happy with the framework.
I think the fact that we have been as close as we have to the
target for this period does generate an expectation that that
will always be the case and it will not. I think that will create
difficulties because I think it will create a good deal of excitement
when we are hit by some kind of shock which drives us further
away. I think we just have to live with that and try to explain
to people that the only way you can really judge, it seems to
me, is on average and over time. The kind of precise monthly number
in relation to the target I just think is not an appropriate criterion,
but we will face that problem when we come to it.
427. You are not worried then that with that
framework and with the fact that you have been undershooting that
there are going to be people out there looking at you and saying
"this is typical of central bankers, they are always far
too cautious and keeping the lid far too tightly on inflation,
they could give us a bit more leeway"? Are you not worried
about that potential criticism being heard more and more over
the next few months?
(Sir Edward George) I have no doubt that people will
say that and I will explain, as I have done very often already,
precisely how we do actually take account of the exchange rate.
That is really the complaint, people say that because you have
kept the monetary policy too tight the exchange rate has been
stronger than it needed to have been and, therefore, that has
had a very aggressive impact upon some parts of manufacturing
in particular and in some other sectors and that has had regional
concentration effects. As you know, I am very conscious of the
imbalance and I have spent a lot of time trying to explain to
people why the imbalance is like that, including how we actually
do take account of things like the exchange rate in the prospect
for inflation and, therefore, policy. We have to spend a lot more
time explaining that. The letter that we would write would obviously
be a part of that process.
428. Finally, Governor, and it is on the same
point, you are now on to your third way of assessing what you
think will happen with the exchange rate and most recently there
has been a slight fall in the exchange rate, which is roughly
what you expected. I know this is tempting fate but do you think
you have now got a handle on the exchange rate or is it just good
(Sir Edward George) No, absolutely not. We are in
the middle way, if I can use that expression, because we still
do have the random walk, which is flat, and we have the uncovered
interest parity approach and we basically draw a line through
the middle because we do not know of a better way to do it than
that. I would not be at all confident. In the long run I believe
in uncovered interest parity because I think that the rationale
for that is more persuasive than the others. I think as a forecasting
technique people can show that the record has been that it has
been worse than some of the others. No, I do not believe that
it is something that we are ever going to be very confident about
being able to forecast.
429. Thank you all very much indeed.
(Sir Edward George) Chairman, I believe that this
may be the last occasion on which you chair this Committee.
430. When you are here, yes, that is indeed
(Sir Edward George) I would just like to acknowledge
that and to thank you for your Chairmanship over the last few
years that we have attended. Thank you very much indeed.
Chairman: Thank you for your kind words.