Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 120 - 139)



  120. How likely is it that the United Kingdom is going to suffer from price deflation over the next couple of years?  (Sir Andrew Large) Well, I suppose if one had asked that question ten years ago, one would have said, "Well, there is no evidence of price deflation anywhere in the world, so is it very likely?" We do see price deflation now taking place in Japan, for example. Happily, the circumstances in this country are very different from those in Japan. I certainly do not want to give the impression of saying that I think that it is likely or trying to put any degree of probability on it, but I certainly think it is something that one needs to bear in mind, do everything possible and look at possible factors that could be leading in that direction.

  121. If it occurred, what would be the implications for financial stability?  (Sir Andrew Large) It is a very, very interesting point. If you look at the Japanese situation where you have deflation, it renders the conduct of monetary policy far more difficult. I suspect, though this is something that different economists may have different views on, but I suspect that is one of the reasons, that one has a positive target for inflation and, going back to our earlier questions, one of the reasons that there is in having value in this symmetrical approach to that target. I think there is some validity in that, but I think that if one finds oneself, heaven forbid, in a situation where deflation was actually taking place, I really do not think I can give you an answer to what one could do. One would have to be reconsidering and looking at all the possible tools at one's disposal in order to try and handle the situation.

  122. You mention Japan, but is not one of the problems with Japan that they are running out of tools to use on this?  (Sir Andrew Large) Yes, the major problem in Japan or the major problems in Japan are the structural ones that we were talking about before and we are in the fortunate position that of course, as with any economy, we have problems and areas of difficulty, but we have a very, very much stronger position in our basic structure of the financial system than is presently the case in Japan.

  123. But is it not the case that here and even more so in America the interest rates are getting so low now that if you did have a problem which required lowering it, you would not have very much scope?  (Sir Andrew Large) Well, this of course is the point I was alluding to. I am sorry I did not actually specify it, but that was exactly what I was meaning, that once you have a situation where interest rates get close to zero, then of course the likely tools at your disposal are rendered far from ideal.

  124. Would the Bank, under your responsibility, then look at a scenario where that did happen, even if it is remote, to see what should be the reaction of the central authorities? Is that not one of the responsibilities that you take on and is that not central to the responsibilities of the tripartite committee too?  (Sir Andrew Large) I would be surprised if thought had not been given on a purely theoretical basis. I am sure thought would have been given and I am sure in all central banks people have given thought to this and certainly it is something one would expect to find.

  125. Your predecessor, Mr Clementi, said that the current rate of house price inflation is "unsustainable". Do you agree with that?  (Sir Andrew Large) I think that when you have a rate of house price inflation of 20 per cent or so and if you look at that continuing over a period of years, it is difficult to avoid agreeing with that, but I think that what we need to look at is actually what happens to that rate and it appears that there seem to be signs that that rate is already slowing, so that probably bears out the point that he made. I think he made this comment, when? Was it back in June or so? I think since then it would appear that there is a slowing in that rate already manifesting itself.

  126. What are the consequences of it happening?  (Sir Andrew Large) It depends how it happens, I think. This is one of these areas where, as with many areas where assets are involved, you have to look at levels and you have to look at rates at which things happen and the knock-on consequences of them. Clearly what is more desirable is that if rates are unsustainable (and I referred to that 20 per cent figure at an earlier date) that will tend to create problems over a period of time, and it would be more desirable that it should even off and maybe come down to a lower level rather than going in the opposite direction all of a sudden which can be far more disruptive. This is really the behavioural psychology that leads to rapid potential movements in asset prices, is complex and undoubtedly something that we have to try to understand.

Mr Ruffley

  127. Your predecessor responsible for financial stability in May actually said the following: "The level of house price inflation, the growth in prices, is unsustainable and the longer it goes on for, the sharper is likely to be the eventual adjustment." What do you think the eventual adjustment will be in the next twelve months?  (Sir Andrew Large) Well, may I just ask you precisely what you are asking? Are you saying what level will house prices be at in twelve months?

  128. Yes.  (Sir Andrew Large) I cannot give you an answer as to what house price levels will be in twelve months. I think what he was saying was the point I was making before, that if you have very rapid upward movements that go on for too long, there will be a painful adjustment process.

  129. I am asking you what assumptions you are making because this is going to form, I would have thought, quite an important part of your work in performing the role you are performing.  (Sir Andrew Large) Yes.

  130. You must have looked at forecasts for house price inflation over the next twelve months and there will be a spread of forecasts in different bodies. What do you think the increase is going to be in the next twelve months?  (Sir Andrew Large) I cannot tell you. I am sorry to disappoint you and you have asked me several questions that I cannot give you numbers on and here is another one. Why can I not give you a number? Because there are so many factors that could influence the course of events: the manner in which consumer confidence changes; the factors that cause it to change; the speed at which it changes; and the way in which people then conduct their affairs. There are many, many factors behind it.

  131. What is the working assumption you make, as an economist and as a prospective policy-maker, about house price inflation in the last twelve months? How do you think it has been nationally?  (Sir Andrew Large) In the last twelve months?

  132. Yes.  (Sir Andrew Large) I have seen various statistics.

  133. What do you think it is basically?  (Sir Andrew Large) Well, it appears to have been somewhere, and not just in the south east but various other areas of the country where there have been very rapid movements, and Edinburgh happens to have been one, I believe, and a number of other places, where it has been up in the 20s and 30s and there have been others where it has been below ten. Nationally, I believe the figures are for everybody to see. It has been somewhere, as I understand it, at the sort of 15 to 20 level.

  134. Do you think it can run at that level?  (Sir Andrew Large) Well, this is the question that David was asked in June.

  135. May actually.  (Sir Andrew Large) I beg your pardon.

  136. I just wonder whether your estimate is going to be higher or lower than that figure. Higher or lower?  (Sir Andrew Large) I would think it is likely to be lower.

  137. By how much?  (Sir Andrew Large) I cannot tell you.


  138. We are getting to the end here, Sir Andrew, and I would like to ask you a question. How good a deal is the consumer getting in financial services at the moment?  (Sir Andrew Large) Well, you have to look at that from various points of view, Chairman, I think. You have to look at it in terms of choice, you have to look at it in terms of the products on offer, you have to look at it in terms of the prices the consumer pays, you have to look at it in terms of whether the consumer has adequate information to make informed choices. There is a whole range of issues.

  139. Do you think the market works very well now?  (Sir Andrew Large) There are areas where the market has not worked as well as it should.

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