Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 120-139)



  120. I am not looking for Harry Potter, I am looking at the Bank of England's Governor and the Deputy Governor. I am not asking for anything magic, Mr King, I am just very quietly saying tell us what you intend to do, because Mr Beard asked, Kali Mountford asked and we got the answer "There is nothing much you can do except ensure macro-economic stability".
  (Mr King) Look at what we have done. We have brought down interest rates seven times this year. That has maintained an overall balance in the economy. Unemployment has fallen steadily over the last eight to nine years, as the Governor said. Some sectors will decline, other sectors will expand. Overall, employment has continued to rise. Is that not the main contribution that the Bank of England can make?

  121. I would like a balanced economy. Manufacturing seems to me to be a very key part of that balance and it is continuing to decline. Your answer was that it will decline but that it will be replaced by something else. So you do not see anything the Bank should be doing or the country should be doing to at least arrest that decline, if not turn it round.
  (Mr King) We, too, would like a more balanced growth path. We have said that publicly. We have one instrument, the interest rate, and we have used that to ensure that the economy as a whole has remained balanced and that total employment has continued to rise. That is the use to which we have put our one instrument. We would also wish we had a second instrument that would enable us to change the exchange rate, but we do not. I think it is unlikely that the exchange rate will continue at its present level, but there is nothing we can do to change that, and nor is there any certainty about that. I think that is an honest answer.

  122. There is nothing you think you can do to actually help the North West. If you have been to Newcastle I would advise you to go a bit further up the coast and just walk about and see how the people are living. It is far different from the picture you are painting, I can assure you. If you come to Bradford and inner city Leeds, it is quite a shocking experience, Mr King. That is why complacency is not appreciated.
  (Mr King) There is no complacency here, Mr Mudie, let me tell you that. Inner city London also has the same sort of problems and these problems are not ones that you can redress by changing the interest rate.

  123. What measures do you suggest, Mr King? A lad in Brixton is hanging on your answer because his future depends—
  (Mr King) With great respect, the aim of the Monetary Policy Committee, which has been given one interest rate to maintain—

  124. I am not speaking about the Monetary Policy Committee —
  (Mr King) But you are. We are here as the Monetary Policy Committee.

  125. Can I just make it clear, Mr King? I came away from Ms Barker because I am speaking to you as Deputy Governor. So it is not the Monetary Policy Committee, it is the Deputy Governor of the Bank of England. What measures do you suggest we take to make the North West as prosperous as the South East?
  (Mr King) The role of the Monetary Policy Committee is to maintain a balance in the economy so that you, as politicians, can take measures that you are elected to take to do with regional policy. We are not here to implement regional policy. We have been given a remit by elected politicians.

  126. Why do you have regional representatives? Why do you call for a report—
  (Mr King) We do not have regional representatives on the Monetary Policy Committee.

  Chairman: The Governor wishes to come in.
  (Sir Edward George) I am very glad Mr Mudie can distinguish between me and Harry Potter.

  127. You are slightly older.
  (Sir Edward George) I really do think that you have to address these kinds of questions to the political circles. We are given a mandate by Government to achieve 2.5 per cent RPIX inflation. That is very precise. That is a political decision and they have delegated the technical implementation of that decision to the people you see before you today. That is our job. The reason that they have done that is because they believe that macro-economic stability reflected in stable inflation is the best help that they can give to the country as a whole. The result is that we have unemployment which is lower than it has been for 25 years in this country, not just for the country as a whole but in every region of the United Kingdom, up until the recent upturn. We are beginning to see a softening in the labour market because of the international environment and the impact that is having on us. Frankly, it is very easy for you to say "What are you going to do about these very severe, sectoral problems, regional problems and problems of deprivation and poverty right next to us on our doorstep?" Frankly, we say that we are responsible for monetary policy and we are doing everything that we can to deliver the stability which delivers low unemployment. Frankly, there is nothing more that we can do.

Mr Cousins

  128.  Do you think that emphasising the inflationary aspects of the correction in the exchange rate, Deputy Governor, is the most helpful way of addressing these imbalances?
  (Mr King) I think when we have discussed the consequences of a change in the exchange rate we have actually looked at all aspects of that correction, one of which would be a change in the trade picture, a change in the balance between domestic demand and net trade, and, hence, a change in the balance between manufacturing and services. There might be a short«run inflationary consequence of that, but we have to look at all of those things together. I do not think we looked at any one rather the other.

Kali Mountford

  129. I would like to take you back, Sir Edward, to about four years ago, to the independence of the Bank of England and the first time I ever met you (so you may not remember it), discussing the terms of reference of the independent Bank of England. In looking at the inflation rate, I remember quite distinctly you discussing the importance of employment and unemployment overall in making judgments. We are now seeing a rise of 4,300, I think it is, and when we look at the manufacturing sector we can also see that the rise in unemployment is fairly similar to the loss in manufacturing. Do you not think, in your terms of reference, you do have a very significant and particular duty to look at that?
  (Sir Edward George) Our terms of reference are absolutely quite clear. They are to achieve 2.5 per cent RPIX inflation on average over time. The reason that the Government has set us that objective is because they believe, as I believe, that actually achieving the stability between overall demand in the economy and the supply potential of the economy, which will deliver that low, stable inflation, is actually the best means of maximising the sustainable level of employment and the lowest sustainable level of unemployment in our economy over time. I have to tell you that achieving the 2.5 per cent inflation target is tremendous, but what really gives me satisfaction is the fact that unemployment is now lower than it has been for 25 years, or was until, as I say, the last month or two. I just think that that is as much as you can ask from monetary policy.

  130. I can ask you one more thing and that is whether you think the trend will continue?
  (Sir Edward George) In the short-run, because of the very severe slow down and recession that we are seeing in the rest of the industrial world, it is going to be extremely difficult to sustain that, and I have said that before. That is what we are trying to do. Others in the committee were suggesting that we were rather rash to try and do it, and that it would be better not to have kind of stimulated consumer spending. Frankly, I think that this is the real objective underlying the low inflation target; that over time we will have the economy growing faster, we will have more employment, less unemployment and for the economy as a whole we will have rising living standards. It is not saying "That will, in an optimistic way, spread through the economy"; it has spread through the economy. The unemployment figures were lower in the summer in every region than they have been for 20, 25 years.

Mr Tyrie

  131. This is a very interesting debate and I would love to prolong it. As a strong supporter of Bank of England independence I would only chip in that there are some dangers in exaggerating the extent to which monetary policy directly affects the unemployment level or can make a huge contribution to conditions for long-term growth. The unemployment level, I think you would agree Governor, is primarily determined by the supply side labour and market conditions and reform. I think if you take too much credit on the upside, when things are going well and unemployment has fallen, you are going to find yourself in frame for falls in employment, over which you do not have much control.
  (Sir Edward George) I am quite sure that is true. We absolutely anticipate that if the economy does not do as well in future as it actually has done in the past then the people will say "It is not such a good idea, is it". We operate on the demand side of the economy. There is not much we can do directly about the underlying growth on the supply side of the economy, and that does depend on all of the things that you debate all the time in Parliament. It depends upon education, it depends upon health, it depends upon the labour market regulations and all the details of tax and spending decisions as well as the kind of basic endowment of a country in terms of resources. What we can do is to try to ensure that aggregate demand—taking external demand and domestic demand together—is kept broadly in line consistently over time with the sustainable rate of growth of supply. That is what we are trying to do. So that I do think monetary policy can affect unemployment. If demand falls short of the sustainable growth rate then I do think unemployment will rise. What we are trying to do is to reduce the risk of that happening.

  132. I will settle for that. Going back to the relationship between the UK economy and the global economy, most of this document—and certainly the growth forecast—is predicated on the view that the balance lies in the likelihood of some reduction in the exchange rate and, also, that the UK will benefit from a pick-up in global economic activity as a consequence of the loosening of fiscal and monetary stances that have been put in place around the world, particularly the United States. You said right at the beginning, I think, in your introductory remarks that September 11 could not have come at a worse time, and that the effects of September 11 will be to deepen and prolong the recession. How do you reconcile that view, with your view that you think there will be a pick-up in the middle of next year—and I think you also said that the pick-up would be likely to be stronger than previously thought?
  (Sir Edward George) Somewhat. I am not talking about a kind of real boom, but we were looking for a very, very gradual pick-up from the United States. Largely, I think—and I have to be jolly careful because I got terribly misreported—if you actually stand back and you look ahead to 18 months, two years, three years, and you say to yourself "What has actually happened on the supply side of the global economy which would mean that we could not sustain, not the crazy 5, 6 per cent growth rates that we saw in the United States for a period but something stronger than we saw in the early 1990s?" I find it very difficult to think. You can point to some supply side effects—the security impact which may have a dampening effect—but, by and large, I believe that the growth that was coming from the spread of technology through the United States' economy and the application of technology through the United States' economy has got further to go. I think that can spread to Europe and to the United Kingdom to a degree which it has not as of now. So that the supply potential, looking out, is quite encouraging. Once we have got over the adjustment—and that has already gone quite a long way—and once we have absorbed the over-hang on investment, then I think over that kind of timescale we will get back to above what we would normally regard as trend rate of growth for the industrial world as a whole and the global economy. If we are now pushed down somewhat below where we thought we were going to be, then there is the prospect that you will have a somewhat more positive pick-up to that situation when the pick-up begins. I think I would say two other things. One is that there is an awful lot which is very positive about the industrial economy right now. We do have low inflation and that provides more flexibility for policy stimulus. We do have robust financial systems, which mean that the pressures that come with this kind of slowdown are not exaggerated by the financial problems to the degree that they were at times in the past. I think these are reasons for not being excessively pessimistic. We have had a very strong policy response everywhere—obviously particularly in the United States because that is where the thing struck—and that has been on the monetary side but also on the fiscal side and they are talking about more fiscal stimulus. However, within the Euro zone, too, there was a point where there was some doubt as to whether they would even allow the automatic stabilisers to operate on the fiscal side within the Euro zone, but they decided that they had to do that. They have given a monetary policy stimulus just as we have. So that I think it is absolutely wrong to take the view this is all gloom. I think what we are talking about is the performance over the next twelve months or so. After that there is every reason to suppose that we will get back to a growing trend rate. You do after recessions.

  133. You are saying that there is going to be quite a sharp bounce-back.
  (Sir Edward George) No, I am saying somewhat stronger than we expected before.

  134. Stronger than you previously thought. You already had one built into your forecast, and it is now going to be stronger than you thought. You think that the underlying conditions for that coming to pass are good. There is, is there not, quite a fundamental difference of view within the MPC on this? If I take some other quotations from today, Dr Wadhwani said that when bubbles burst the effects on declines in output tend to be quite long-lived. (I think that was your phrase but I may not have it absolutely right.) Kate Barker said that the weakness in the global economy will have a greater impact on the UK than previously thought. So we have quite a difference of view in the MPC. Have I got that right?
  (Sir Edward George) Yes, there are differences of degree—about most things, actually.

  135. Can I ask you a semi-historical question, to which I do not know the answer myself? We now have the three largest economies in the world either in recession or very close to recession, with most of the relevant arrows pointing downwards. When was the last time that those sorts of conditions prevailed?
  (Sir Edward George) 1973-74.

  136. There is a rider to my question, but by all means answer that first.
  (Mr King) I think what is different now and what I think does change the outlook is the fact that all members think there are real downside risks to the world economy. What is different about the present situation, which has never occurred before since quarterly data were first constructed in the mid-1950s, is that if it is true that the US is in technical recession with two negative quarters of growth, that has never happened before without the UK having had a quarter of negative growth at the same time.

  137. That is just the US but now we have got Germany and Japan.
  (Mr King) In other words, the link between the US and the UK looks very different now than it has done at any point in the past. That reflects the imbalances. There is very strong domestic demand growth in the UK, which is offsetting what is happening in the rest of the world. The rest of the world is going through a very severe downturn, there is no doubt, and the outlook for Japan is particularly worrying because in both Europe and the United States the thing that I think does affect the committee's judgment is that in both areas there has been a significant relaxation of policy in the past few months which will, at some point, come through.

  138. Are you saying that for the first time in modern, post-war economic history, the world—and particularly the US—can sneeze and we will not catch a cold?
  (Mr King) If you look at what has happened so far, it is the case that the latest growth figure in the UK over the last twelve month period is 2.1 per cent, at a time when the US is showing virtually zero. That is very unusual, but it is true. The next few quarters may well be very weak. The latest numbers still show pretty robust consumption growth in this country, and again that is unusual given the world context in which this is taking place. So there is enormous uncertainty here. The two factors which are important in thinking about what will happen to the world economy and, hence, to the UK, are, first, and far and away the most important, the very significant policy easing that has taken place during the course of this year, and, secondly, the fact that one of the views that we took following September 11 was that the consequence of that was a significant increase in the degree of uncertainty that would affect investment decisions for a period but then that uncertainty would be resolved. One of the factors which explains this weaker profile for the next two or three quarters and then a slightly sharper pick-up than before is a switch, in our view, as to what will happen to investment expenditure, and we do see a sharp slowdown in investment expenditure in the short-run, but then some picking up further out as the uncertainty is resolved. However, as Sushil has emphasised today, there is just enormous uncertainty about all of these things. We are not saying anything will happen, we are always talking about a balance of probabilities.

  139. That is what worried us at the start. We are quite happy to go with the remark that there is enormous uncertainty and we are very happy to go along with the balance of probabilities, but when the probability is shown in tables as a 1 per cent chance of recession some of us tend to get a little bit jumpy. We do not mind even taking the Governor's view that the difference between 1 and 5 per cent is negligible, but to write it in at such negligible levels is a cause for concern for those of us who watch these things, even if it is backed up by a group of other commentators whose forecast you have also published in the same document. I wonder whether Dr Wadhwani could add to that. Do you agree with what I have just said?
  (Dr Wadhwani) Which particular aspect?

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