Select Committee on Treasury Minutes of Evidence

Examination of witness (Questions 40-59)



  40. Sure. You would have been inclined to go for the 25 basis points which suggests you would have had reservations about a 50 basis points cut, presumably believing that it would carry some risk that should be avoided. What would have swayed you against 50 and in favour of 25 exactly?
  (Ms Barker) In terms of the discussion and the debate at the committee at that time, as I understand it, and I have to say it is difficult to describe this in detail, I think there were two points. One was, of course, which has already been referred to, the information value of making a 50 basis points cut as opposed to a 25 basis points cut, the question as to whether that might be likely to signal a very significant change of view of the economy and have some negative effects on confidence. There is often a great deal of discussion about that. The other point was a question that is obviously very important in the conjuncture at the moment which is exactly what is going to happen in the US economy and what effect is that going to have in the UK and, in particular, that clearly is a negative influence from outside, is that going to affect the domestic economy which has, of course, been growing very strongly, or are there signs that the domestic economy is still growing so strongly that it will not be much affected? It is my view on that side of the conjuncture that I think would have led me towards 25 basis points.

  41. So you would have been a cautious dove?
  (Ms Barker) You may wish to categorise it like that.

  42. Finally, can I ask you to expand a bit on the answer you gave to question eight in our questionnaire. We are talking about using the target of RPIX.
  (Ms Barker) Yes.

  43. You said "it is important to start off with the realisation that the perfect policy solution almost certainly does not exist" and that is understandable. Then you go on to say, "The question clearly is what is best for the UK over the next few years, given the goals which other central banks have adopted". I did not quite understand the point you were making there, can you just expand on that?
  (Ms Barker) What I was thinking about was given the monetary history of the UK, and perhaps uniquely we have been through a long period where we have very often changed our inflation targets and the way in which we manage our policy, we are at a certain state of maturity in the monetary management cycle. It seems to me if we look at central banks, some central banks are set up with more independence or their remits give perhaps apparently slightly greater weight to growth and employment. It is right for the UK in particular to have a rather clear inflation target, to give a priority to the inflation target, and that is the best thing to establish low inflation and credibility in low inflation in the UK, which I think is particularly important. I mean in that sense if you are looking at the UK on a spectrum of central banks, of independence and the way in which they operate their goals, given our background economically and, indeed, our constitutional background, it seems to me that kind of framework is right for us.

  44. Does it follow from that that you think the way we have chosen to do it here in the UK is better than, for example, the way it is done by the European Central Bank?
  (Ms Barker) Obviously I did not express myself as clearly as I might have done. What I intended to indicate was that it was right for the UK, over the next few years given where we have been coming from in terms of our background. If you look at the European situation they have, of course, come from a different situation, very often there is a much stronger tradition of independent central banks which has had much greater political and public acceptability. Therefore, I do not think you can necessarily conclude that what is right for us today is right for the ECB or necessarily for the UK at some future date.

Mr Davey

  45. You are about to join the hothouse committee with some big intellects there but you are all playing as a team with your own particular role. What is your comparative advantage in that team? What will you bring to the teamwork of the MPC?
  (Ms Barker) To some extent I have already talked about that in describing some of the business experience I have had which I feel is particularly relevant. It is my view that experience of working in a company, of experiencing it first hand, the pressures in the way in which a company goes about taking decisions, particularly doing it at the kind of level I did in Ford of Europe, which after all is a particularly big company, is a useful experience. I had the opportunity to build on that experience in my work for the CBI because since I have that strong kind of business background I have been perhaps better able than other people at the CBI to engage with businesses in discussing particular decisions with them and I have, on occasion, had the opportunity to do so and interest in pursuing that. That is one particular expertise. I would hope also that my expertise in talking to business audiences, in setting out economic ideas to them, will be helpful in the role that I have described of the importance of communicating the messages of the MPC and what it is doing. I have also more recently, although I am sure the Committee will be glad to know I resigned from this position yesterday, been a non-executive director of a building society, which again has brought me back into direct contact with the financial markets and consideration of questions as to how to manage financial risk, again building on experiences I had earlier. I think that is very useful and also it has given me a reasonable working knowledge of what is going on in the mortgage market, which is an important part of the transmission mechanism. I do come with quite a lot of relevant experience of working as a practical economist. There are also other pieces of experience I have had more recently, for example considering how changes in the tax system or different approaches to taxation may affect corporate behaviour, which will also be relevant.

  46. Thank you for that. You have obviously focused in on some very practical issues from your experience. Is there anything from your academic background or your own intellectual interest that you think you can draw upon in your work in the MPC?
  (Ms Barker) To some extent the kinds of things I am interested in tend to build on my background working as a practical economist and working as a practical person. One point that is always of interest to me, I think, is investment behaviour, the way in which companies approach investment decisions, how they think about financial markets, inflation rates, all that kind of thing going forward. That is something I am interested in, and it is something I am interested in developing the understanding of further. It is something that is important in a lot of debates in the UK at the moment, the debate about what is going to happen to productivity in the future for example.

  47. You touched on this in an earlier answer about what research projects you might decide to lead or to be part of when you join the MPC. Clearly it is early days yet, you need to talk to people at the Bank about what is going on. DeAnne Julius, who you are directly replacing, led a number of research projects in the service sector, measuring inflation, for example. Do you have any particular issues that you would like to join in on those types of research projects that are already there or, as you have just said, new research projects on investment behaviour?
  (Ms Barker) I indicated that and also I talked earlier about an interest I have in looking at the way in which inflation works at a more regional level, the way in which it is transmitted between regions. I am also very interested in the development of a piece of work which I know is going on about the measurement of the new economy and productivity. I have quite a wide range of interest. You are right to say that it is too early to say definitely which way I would go first. Certainly somebody asked earlier about day to day activity, clearly I would see leading research projects as a very important thing to do. I think I referred to that in my written answers.

Mr Fallon

  48. The IMF suggested last week that the United Kingdom economy will grow around 2.6 per cent this year, slower than the three per cent last year. Do you agree with that assessment?
  (Ms Barker) No, on the whole this year, although as the Committee knows forecasting is a very tricky business, I would expect the figure to be somewhat lower than that. One of the reasons I would expect it to be lower and of particular uncertainty, and something that is going to be very difficult for any forecaster at the moment and, indeed, will make some short term difficulties for discussions on the Monetary Policy Committee, is what impact foot and mouth is going to have on growth. I think there are obviously a variety of factors going on which may be slowing the economy at the moment. I have already talked about the US economy, that is one thing that is slowing the economy down. It is not easy to assess but one can get a feel for it. The impact of foot and mouth, however, is particularly difficult because it almost certainly in terms of its macro economic effects—clearly it will have a lot of micro economic effects—it will depend almost entirely on the behaviour of foreign tourists coming into the UK. That is not something which macro models have so far been very good at capturing, but an estimate of that suggests to me that it will have a significant effect, perhaps taking 0.2 or 0.3 off economic growth. At the moment I would have a forecast probably rather lower than 2.6 per cent.

  49. So if the UK is going to slow faster than the IMF predicts, monetary policy will have to be looser, will it not?
  (Ms Barker) I do not think that would necessarily follow because, after all, if the economy was to be growing at this 2.6 per cent that would be above what many people would think of as being long term trend for the economy. Of course the real question for monetary policy—it is the question at any time, it is not just a question today—is exactly where are we relative to trend, do we need to be a little bit below trend or a little bit above trend in order to get inflation back to the target? If you think about what I have just said about foot and mouth, that will slow the economy this year, but in some sense that is quite a technical matter. It is much less clear that it will still be slowing the economy next year and so very unclear what effect it will be having on inflation two years down the line. It is in that sense that I express some worry about some of the numbers that come out this year being difficult to interpret because foot and mouth may have quite strong short term effects which actually will not make very much difference to inflation prospects in 18 or 24 months.

  50. You do not see much of a role in monetary policy in helping us avoid the economy slowing faster than the IMF predict?
  (Ms Barker) Underlying that question is whether I think it is desirable to prevent the economy slowing faster than the IMF would predict. I remarked that the key point in assessing monetary policy was we are not after all aiming at keeping a particular rate of growth, we are aiming at keeping inflation on target. I am sure Sir Michael Spicer might remark on the fact that I had come up with the wrong target if I was to say it was important to monetary policy to have a role preventing growth slowing. What I am saying is quite a lot of the slow down in growth will be due to foot and mouth but that is something that since it does not have very clear long term effects on inflation is very difficult for monetary policy to respond to at all, and it is a situation which clearly needs to be tackled through the operation of fiscal policy.

  51. In answer to question 12 in your evidence to us you said that if inflation was under shooting significantly it would not be desirable to bring inflation back to target quickly. Would you hold that view if inflation were above target?
  (Ms Barker) This comes back to the point about the two objectives. The reason on the whole that people are concerned about moving the inflation rate back to target very quickly, or trying to move it back to target very quickly, is that it leads to volatility in output and employment which can be unhelpful further down the line, i.e. to get inflation back to target quickly might risk putting too much demand into the economy that might then prove very difficult to control. In that sense when you are trying to move back towards the target I think it is just as right when you are above it as below it. The reason I expressed it that way round is as a matter of fact that it is more often expressed the other way round, that it is wrong to cut inflation too sharply because it has undesirable effects in putting output down for a short time. I think if you are going to be symmetrical, you have to equally say there are risks and dangers in having a bumpy path with output growth which includes strong periods of growth.

  52. Are the dangers to the MPC's credibility the same?
  (Ms Barker) If you are operating a symmetrical target then, yes, I believe they should be the same.

Sir Michael Spicer

  53. You have touched just now in answer to Mr Fallon on the mix between monetary and fiscal policy. Can you give us some feel for which you think is more important, fiscal policy or monetary policy, in terms of the real economy and in terms of inflation and in terms of what you are going to be considering?
  (Ms Barker) In terms of achieving the inflation target, I believe that the position we have in the UK, through the operation of the monetary policy, is absolutely right. Given that I think achieving the inflation target is important to long term growth in employment, in that sense I think monetary policy is more important perhaps. That does not mean that I think there is no role for fiscal policy beyond meeting long term rules. Fiscal policy may be very important, for example, in looking at imbalances in the economy. In evidence to this Committee before I am sure we have talked about difficulties in manufacturing and whether or not it is a good time, therefore, to increase taxation on manufacturing and argued that with manufacturers in difficulties this is not a good time. Looking at imbalances can sometimes be a matter for fiscal policy. I have to say, again, I think only relatively unusually.

  54. You are not arguing that fiscal policy does not have its own substantive effect on inflation?
  (Ms Barker) No, I am arguing as an approach to managing inflation, monetary policy is the right way to go. I am certainly not arguing, for example, if there was to be announced tomorrow enormous contraction in fiscal policy, that would not be something that the monetary policy would have to take account of. I have to say I think it is very difficult to say which is more important, they both clearly have an effect.

  55. If that is the case, does it make sense in your view to separate monetary instruments from fiscal instruments and the responsibility for those?
  (Ms Barker) The reasons for separating them are good and, yes, I do believe it makes a difference. In answer to one of the earlier questions I talked about the benefits of credibility that have been gained by having the two separated, and I think it is absolutely right that an independent committee that is seen to be free of political pressures can improve credibility, and the experience of the last four years has demonstrated that to be so in the UK. I do not believe, which may be the implication of your question, that it necessarily makes policy co-ordination more difficult.

  56. But if, as you have suggested, there is impact on inflation of fiscal policy, do you think that it is the job of a member of the MPC to make that very explicit in public? For instance, if there was a loose fiscal policy which was forcing up interest rates, would it be the job of the MPC member to make that plain to the outside world?
  (Ms Barker) It is certainly the job of the MPC, and as I understand that is indeed what happens, to make plain to the Treasury what the impact of particular changes in fiscal policy would be on the MPC's decisions, as it were, to make plain their reaction function. It is generally clear in the minutes, rightly, what view the MPC has taken of an announcement the Government has made, in terms of its effect on inflation and the effect on their decisions. Again, that is absolutely right, those things should be made clear. I think I said in answer to an earlier question that on decisions on fiscal policy which are taken by Parliament and by elected Ministers, I am not sure that I would necessarily wish to criticise them. But I think it should always be made clear what the implications of them for monetary policy are.

  57. I think the thrust of my question was to see what you felt about individuals taking a stance within the MPC. Do you think it is right that if there is a loose fiscal policy, or looser than it should be in terms of inflation, an individual member of the MPC should make speeches to that effect and should be proselytising against the loose fiscal policy, for example?
  (Ms Barker) I think if an MPC member felt very strongly that a particular course of fiscal policy had had a particular effect on interest rates it is open to them to say so and to indicate that, yes.

  58. And you think if it is open to them then it should be something that they should seriously consider doing?
  (Ms Barker) It is something that they should seriously consider doing but they also have to think about—You use the word "criticise", I think it is absolutely right that they should make it clear how fiscal policy has been taken into account and how it has affected the decisions they have taken, but I think an MPC member should be very cautious about criticising the democratic fiscal policy which emerges.

Mr Beard

  59. In your response to question 13 you said: "It is pretty difficult to imagine how to manage monetary policy without the use of a concept such as the natural rate of unemployment . . .". And you go on to say: "I would judge it likely that unemployment could not fall significantly further in the short-term without putting upward pressure on wages, and therefore that the UK is very close to the NAIRU at present." Unemployment has fallen hugely in recent times and there has been no pressure on inflation from that. Why should that not continue?
  (Ms Barker) I also said that I thought establishing where the NAIRU was, was always a difficult matter. However, unemployment has now fallen so far that it is beginning to reach levels, and certainly has reached levels probably in parts of the country, which it would be reasonable to describe as full unemployment. In some regions there are really very few people left to be brought into the labour force. The reason why I think we now may be reaching a time when it will be difficult to reduce unemployment very much further is based on an observation of that simple fact and an observation also of what is happening to skills shortages. Something I am conscious of, not only through survey data but also through direct contact with business, that in some regions there are skill shortages. Indeed, in some cases it is actually wrong to describe it as skill shortages, there are just labour market shortages. In those circumstances you start to become worried that if unemployment were to fall significantly further that would start to bring upward pressure on wages.

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