Select Committee on Treasury Minutes of Evidence


Examination of Witness (Questions 60 - 79)

WEDNESDAY 25 SEPTEMBER 2002

SIR ANDREW LARGE

  60. That is rather astonishing.  (Sir Andrew Large) I have had two days to look at it. I am sorry, there has been an awful lot to try and get under my belt

  61. You have been an observer—is how I think you described it—of monetary policy and everything else for, is it, the 20 or 30 years you have been in the business, and the ECB has been around for quite a long time. Have you not noticed how they run monetary policy?  (Sir Andrew Large) You use the word "observer". What I was implying by that is not that I am an expert in the minutia of the way in which rates are set in different parts of the world, but that as a banker, if you are talking to business customers about things that they are thinking of doing, or if you are looking at the way in which the bank itself is operating, you need to have some feeling for the way that interest rates are moving and the factors behind them. It is the underlying factors rather than the minutia and details of the manner in which they are set.

  62. Let me tell you then that the European Central Bank's inflation target is asymmetrical: it has a cap of 2 per cent, do not go above it. That is quite a different way of defining the target than the one we use. What are the respective merits, in your view, between having an asymmetrical inflation cap and our symmetrical target that says steer at that central number? Do you have any view as to which is a smarter way of handling inflation?  (Sir Andrew Large) As I said to you before, I certainly like the symmetrical approach that we have; I think that it provides you with a firm target that enables you to take policy decisions in one direction or another, whatever the circumstances dictate. I think if you do not have that then you have to look at it somewhat differently.

  63. Therefore, if during your five-year term sterling were to join the eurozone, I take it you would have worries about the monetary system we would be moving into? You would not prefer the way inflation is targeted.  (Sir Andrew Large) Just as I said to you before, I would like to reserve my judgment on the present situation. I am afraid I cannot answer to the affirmative now. I do not know. I would need to look at it at the time.

Chairman

  64. I think what you are telling us, Sir Andrew, is that you have a lot of homework to do yet.  (Sir Andrew Large) That is correct.

Dr Palmer

  65. Just finishing on that, I do get the impression that you are somewhat inhibited by the need to be diplomatic to other countries. Do you feel, as a Governor and because of your contacts in other countries, that you need to exercise restraint in your comment on how they operate?  (Sir Andrew Large) I think one wants to be very clear on one's facts before making comments about how other people operate. That is why I am somewhat cautious.

  66. If we were to meet again at some time in the future might you feel able to comment in a less inhibited way?  (Sir Andrew Large) I might well.

  67. Returning to domestic matters, to what extent do you feel that the MPC is able to influence the rate of economic activity through interest rate changes over the short and longer term?  (Sir Andrew Large) If there are changes in interest rates clearly this can impact consumer behaviour, it can impact investment decisions, it can impact in a number of areas. Obviously, one would expect that that would have an impact over time on economic performance.

  68. Would you expect that the Bank could influence long-term economic performance by varying its interest rate policies?  (Sir Andrew Large) I think for the long term, as I see it, the most important feature is that there is confidence in the stability of the monetary system. I think that is, perhaps, the biggest single contribution that can be made if you take the long term.

  69. What about inflation? Do you feel that varying interest rates is the most powerful tool for the control of inflation?  (Sir Andrew Large) The fact that we have an inflation target and that the tool that has been applied to meet it is interest rate movement, I think, implies by definition that there is an impact—over time. The way it works its way through, of course, is complex and it does not always manifest itself immediately.

  70. Do you feel that, over time as you say, it is an adequate instrument or do you feel sometimes that it is a little impotent; that inflation can get out of control regardless?  (Sir Andrew Large) That is obviously something that the Committee has to look at very, very carefully. The tool that it has at its disposal is interest rate movement and I think the experience over the last five years since it has been in existence has shown that that tool has been a useful one.

  71. During the last five years we have had a reasonably stable economic environment most of the time, with some exceptions. Let us say there was a sudden increase in oil prices. How effective do you think interest rate policy could be in managing the impact of that on inflation?  (Sir Andrew Large) I think there are all kinds of external factors that could cause instability in the economic environment, but that is the tool we have available. So we would have to use it to our best ability.

  72. So you would not anticipate that if there was a sudden increase in oil prices that the Bank would respond promptly?  (Sir Andrew Large) The Bank would have to look at that in relation to all the other factors that there were that could have an impact on inflation. Oil prices may be one but there are all kinds of other ones as well.

  73. In your answer to question 10[2], you said that monetary policy cannot redress imbalances on its own because there are a great number of other factors, many of them structural, including labour mobility, educational standards, tax distortions and the exchange rate. Do you think that it is part of the Bank of England's remit to comment if they see that imbalances in the economy are arising out of, let's say, educational standards or tax distortions? Do you think that this is one of the things you will experience in your role as Deputy Governor?

  (Sir Andrew Large) I think that within the MPC itself of course imbalances and these various factors are discussed and you can see the evidence of that in the minutes.

  74. Would you hope that the Bank would actually make recommendations as to how such distortions might be corrected?

  (Sir Andrew Large) I think it depends what the distortions were as to whether they were in the Bank's area of competence or not.

  75. Well, let's say tax distortions.

  (Sir Andrew Large) I think that tax distortions are going to be for the Treasury. What the Bank has to consider is whether there happens to be a tax distortion which is relevant at that time for monetary stability.

  76. So in the Bank's comments you might envisage making a comment that there was a tax distortion? I do not want to put words into your mouth, but you might comment that there is a tax distortion which is having an impact on monetary policy, but you would not necessarily suggest how to correct that because you would leave that to the Treasury? Would that be a fair statement?

  (Sir Andrew Large) Or I suppose it is possible, and I have not thought this through enough, but I suppose it is possible that the same situation would occur in terms of financial stability and that will lead to the responsibility I have within the Bank as such rather than within the MPC. Clearly one has to be quite judicious in making recommendations about things if you are not clear that the recommendations either will be or are capable of being followed because, otherwise, all you are doing is stoking up concern and actually negatively impacting on the very confidence you are trying to engender.

  77. Yes, I do see the problem. So if the Bank detects what they see is, let's say, a tax distortion, there are various things you could do. You could do nothing, you could privately have a chat with the Treasury officials or the Chancellor and indicate concern, you could publicly indicate that it is a problem, but not suggest changes, or you could actually suggest changes. Do you have a view?

  (Sir Andrew Large) I think one would have to look at the circumstances of any particular case. I do agree with you that there are those four and there may be other options as well.

  78. Yes, and you might do any of those?

  (Sir Andrew Large) Depending on what the situation was.

Mr Ruffley

  79. Sir Andrew, how well do you think you understand the productivity numbers?  (Sir Andrew Large) Which productivity numbers in particular have you got in mind, Mr Ruffley?


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