Select Committee on Treasury Minutes of Evidence


Treasury Committee Questionnaire completed by Sir Andrew Large

A.  PERSONAL AND PROFESSIONAL BACKGROUND

1.  Do you have any business or financial connections or other commitments which might give rise to a conflict of interest in carrying out your duties as a member of the MPC?

  I am in the process of putting my financial affairs at arm's length, to ensure I have no conflicts.

2.  Are there any relevant personal or other factors of which the Treasury Committee should be aware in considering your nomination?

  None other than on my CV—I would be happy to expand on this if it would be of assistance.

3.  Do you intend to serve out the full term for which you are appointed?

  Yes.

4.  Please explain how your experience to date has equipped you to fulfil your responsibilities as a member of the MPC and as Deputy Governor responsible for financial stability.

    —  Member of MPC

    My jobs in both the private and public sectors have required an understanding of financial trends and the factors giving rise to them, including the implications of policy decisions. This applied as a banker, whether in advising business customers or managing the bank's affairs. It also applied as a regulator and member of the Board of Banking Supervision.

    —  Financial Stability

  In addition to the above, I have also taken an active role in seeking improvements in financial architecture, for instance in chairing the G30 project on (cross border) clearing and settlement, in my membership of the IMF Capital Market Consultative Group, in chairing Euroclear, and in my membership of the Institute of International Finance Steering Committee on Capital Adequacy. These areas all raise questions of public policy in relation to financial stability. In addition to the above, I read economics at university.

B. ACCOUNTABILITY

5.  How important do you think it is for MPC members to be subject to ex post parliamentary accountability? Could the current procedures be improved?

  I support the principle of ex post accountability in all areas of public policy making. This was certainly the case whilst I chaired the SIB and I would expect it to be similar whilst at the Bank of England. Being able to explain the basis on which public policy decisions are made is an important ingredient of transparency in our democratic society. It is too early to comment on whether the procedures could be improved, but they seem to be working relatively well and the MPC process seems to be held in good regard.

6.  If you were to stand for reappointment to the MPC at the end of your term, what criteria do you believe should be used to assess your individual record as a MPC member?

  First, the success of the MPC as a whole in achieving the objectives set for it; and, second, my own contribution in assisting that process. This could include my voting record, but also my contribution in terms of offering analysis or points of view which could be seen to have assisted the process.

C.  MONETARY POLICY ISSUES

7.  Is the framework of an explicit inflation target the best within which to conduct monetary policy?

  In a pragmatic sense, and as an observer, it certainly seems to be working satisfactorily. Clearly, having a single, easily-understood and symmetric target is of value both in itself and in shaping expectations and their implications within the economy.

8.  Is it appropriate to concentrate on the projection of RPI(X) at the two-years ahead point?

  There is bound to be a lag in the impact of interest rate movements on the economy as a whole—hence the significance of the inflation outlook. I would like more time before forming a view as to whether two years is the best horizon to consider; and indeed I believe one needs to look at the likely impact at intermediate and subsequent points of time as well.

9.  Do you believe that there is any trade-off between inflation and unemployment (or output) in the short-run or in the long-run?

  In the short term, I can see that there will often be a trade off. Higher interest rates can affect decisions of employers with respect to future personnel requirements and capital expenditures, for example. In the long run, it is harder to say, though I see any trade off as being far less likely. Empirical evidence in the UK in the 1960s did show some correlation, but that relationship subsequently broke down. Nor does there seem to be any consistent relationship across countries. In the EU, for example, we see low inflation with higher rates of unemployment, whilst in Japan we see low—or negative—inflation and generally rising unemployment. Clearly other factors are at work that make any mechanical connection unlikely.

10.  What are the consequences of the current imbalances within the economy for future inflation and growth? What can monetary policy do to address these imbalances?

  Monetary policy clearly needs to keep imbalances under close scrutiny and take them into account in its decision making with respect to stability of inflation. However, the main contribution that it can make in the medium term is to provide stability in one key variable—inflation—which shapes expectations and the behaviour of consumers, investors and employers. This can provide a valuable background against which policy initiatives in other areas can be determined and their results judged. However on its own, monetary policy cannot redress imbalances, whether of strong consumer spending and weak saving, or of service sector performance outstripping that of manufacturing.

  A great number of other factors, many of them structural, come into play here including labour mobility, educational standards, tax distortions and the exchange rate to name but a few. These can indeed have an impact on growth, and need to be taken into account when looking at the likely course of inflation.

11.  What is your assessment of the outlook for UK productivity growth?

  I am aware of the conundrum that productivity growth in the UK has been lower than anticipated or desired—particularly in relation to that in the USA (where however I believe official statistics have been revised downwards). The rate of productivity improvement has been particularly disappointing in manufacturing. The future is difficult to predict. The promised gains from the IT revolution are in my view probable, and indeed empirically in various work environments they have been plain to see. But there is considerable uncertainty about how long it will take to see an improvement in the aggregate data. At the time of the invention of other key technologies, such as the electric dynamo or the printing press, it would have been equally difficult to predict the longer term consequences.

12.  What consideration should be given to asset prices, including house prices and the exchange rate, within the framework of inflation targeting? Would your opinion differ if you identified an asset price bubble?

  The main consideration is the impact on consumer behaviour and industrial behaviour:

    —  Asset Prices. The sustained rise in house prices affects consumer behaviour, for example by encouraging a feel good factor. The question is what factors could cause house price rises to slow and what impact would that have on consumer demand, and consequently on the inflation outlook. This is an area for MPC judgement. Similarly the reasons for, and impact of, changes in the exchange rate require careful analysis and scrutiny.

    —  Bubbles. Almost by definition that which is a bubble will in time collapse—whether the market for tulip bulbs, for IT stocks or for investment bankers. Complications arise in two dimensions. Firstly, recognising what is a bubble, since external changes can cause traditional indicators to be unreliable. Secondly, identifying the behavioural dynamics—both those that cause the collapse, and those which might arise from it. All these factors are relevant to policy formation in relation to inflation targeting and require careful judgement.

13.  What problems do the current strength of the housing market and increasing levels of household indebtedness present for monetary policy and financial stability?

  The first problem is that, in looking at the inflation outlook as a whole, one needs to determine what weight should one give to specific factors such as housing market strength and household indebtedness. Secondly, in relation to indebtedness the existence of a low inflation, low interest rate environment may make higher levels of indebtedness more sustainable. So the challenge placed on monetary policy is to ensure such an environment persists.

  As for the issues raised for financial stability, clearly high levels of indebtedness in relation to housing as elsewhere have implications for the banking system. Banks have made great efforts to improve risk management techniques over the last 15 to 20 years. However, this is an area needing constant vigilance, since competitive pressures for banks to lend have to be balanced by a judicious and reliable appraisal of risks in a constantly changing environment.

14.  What issues arise for financial stability in an environment of low inflation, for example, in relation to the persistence of the real value of debt?

  In a general sense, low inflation should make a substantial contribution to financial stability, by reducing uncertainty, dampening balance sheet fluctuations, and increasing price transparency. What can cause difficulties is when expectations in relation to inflation change. For example, people taking out a high level of debt in a high inflation period, expecting part of the real value of the principal to be inflated away before they come to repay it, may find themselves facing a higher real debt burden than they had initially expected. Inflation however has now been relatively low and stable in the UK for some time, so the scale of this problem is likely to have fallen quite considerably. But clearly the extent to which expectations are aligned with the inflation target will remain a key issue looking forward, and this is something I will want to familiarise myself with.

15.  What role should econometric and other models play in the formulation of interest rate policy?

  As with models in all areas, they have a legitimate and useful role in helping to judge the movement of a given variable by factoring in expected (modelled) changes in other variables in the light of experience. However in my view all models have their limits—firstly they are only as good as the indicators used and interrelationships factored into the model itself, and secondly it is important that users of models can judge under what circumstances the model should be modified or indeed overruled.

  In the banking business models are increasingly used, and I have often worried that there is a danger that an overly mechanical use of models can give a sense of false security. In turn this could obviate or reduce the willingness or ability of the users of models to exercise judgement to ignore or overrule them when needed.

Curriculum Vitae

SIR ANDREW LARGE

Professional History:

2002-Bank of England—Deputy Governor (Financial Stability)
2000-Chairman of the G30 Project on Clearing and Settlement
2000-2002Member IMF Capital Markets Consultative Group
1998-2002Barclays PLC, Deputy Chairman
1998-Euroclear: Chairman 1998-2000; subsequently Director Emeritus
1998-2001Institute of International Finance—Member of the Board
1992-1997Securities and Investments Board—Chairman
1996-1997Member of the Board of Banking Supervision
1992-1997International Organisation of Securities Commissions (IOSCO)—Member of the Board (Chairman 1992)
1992-1993Lloyd's—Member of the Council
1991-1992London FOX (now London Commodity Exchange)—Chairman
1990-1992Large, Smith & Walter (Strategic Consultancy)—Co-Founder
1987-1988Member of the Panel on Takeovers and Mergers
1986-1987Member of the Council of UK Stock Exchange
1986-1987The Securities Association (Chairman)
1980-1989Swiss Bank Corporation (Member of Management Board from 1987)
1971-1979Orion Bank (to Managing Director)
1964-1971British Petroleum


Other Non-Executive plc Board Positions:

1991-1996English China Clays PLC
1991-1992Dowty Group PLC
1990-1992Rank Hovis McDougall PLC
1990-1994Nuclear Electric PLC


Education:

1969-1970INSEAD, Fontainebleau—MBA
1961-1964Corpus Christi, Cambridge—MA (Hons) Economics
1956-1960Winchester College


Additional Activities:

2002-Hungarian Financial Supervisory Authority—Advisory Board Member
1998-Board Member INSEAD, Fontainebleau
1998-Governor Winchester College
1998-Governor Christ College, Brecon


Personal:
Aged 60, married with three children





 
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Prepared 7 November 2002