Examination of Witnesses (Questions 140-147)
RT HON SIR EDWARD GEORGE, MR MERVYN KING, MR CHRISTOPHER ALLSOPP, MR CHARLES BEAN AND PROFESSOR STEPHEN NICKELL
THURSDAY 28 FEBRUARY 2002
140. Let me raise one more issue with you, Governor. When we went to see Mr Greenspan and indeed also at the New York branch of the Fed the same points were made, both of them spoke extensively about the effects that reform of the supply side of the economy can have in keeping inflation low. For example, Alan Greenspan talked about the flexibility in the US labour market and compared it favourably with European labour markets. He talked about exposure of the US economy to global competition and he said this was all bringing sharp downward pressure on inflation. When I read the Inflation Report I do not get the sense, again, that there is a great deal of discussionmaybe there is a great deal of discussion but it does not find its way into the reportabout the conditions on the supply side of the economy, changes in those conditions often are greatly affected by Government policy which may alter monetary conditions, it may alter the scope for inflation. Can you say something about what the Bank looks at in that regard?
(Sir Edward George) Yes. We would, I am quite sure, absolutely share, all of us, the analysis you got from Alan Greenspan, that the supply side is fundamentally important. We do not operate directly on the supply side although by maintaining the stability that we are seeking to achieve that can indirectly affect the supply side by taking that kind of uncertainty about the difference between the real decisions and nominal decisions, taking that uncertainty out of decision making. It is fundamentally important. What we are not able to do is affect the supply side directly through what we do.
141. I am asking about the effect of the supply side on you, not the effect you are having on the supply side.
(Sir Edward George) I was just going to say, what we do is we monitor as best we can the evolution of the supply side in all kinds of ways. We were talking about what has happened in the labour market, for example, and that is an element of the supply side; immigration, what has happened to the actual size of the labour force, that is a factor; what is happening to productivity. All of those things are hugely important and we monitor those as best we can. We make assumptions about those developments in the inflation forecast and what we are trying to do is to operate on the demand side to keep in line with underlying supply.
142. Do you think it would be helpful if the Bank could give us more information in its reports on its view of policy driven changes to the supply side of the economy, whether they are assisting or inhibiting the conduct of monetary policy?
(Sir Edward George) No, I do not, frankly, because, again, this is a matter for the Government. We have a very clearly defined remit and our remit is monetary policy and it is defined by the Inflation Target. I do not think it helps at all for us to seek to second guess Government in any kind of public way. Of course we discuss these questions with them, we get briefed by the Treasury representative on developments in that area and we take that into account in our forecasting and, therefore, through into our policy making decision. Frankly, I think the system works very much better where responsibilities are clearly defined and allocated to different people. I think one of the difficulties I have with the debate in the euro zone is it seems to me that everybody is trying to do everybody else's job and I just do not think that would be helpful in our set up, certainly it is not within our mandate.
Chairman: I see another brick wall, Governor, and with that in mind can I hand over for the last question to David Laws.
143. I have two very, very quick questions. Firstly, we have seen Kate Barker's comments this morning. Do you think there is any further material chance of a cut in interest rates in the current cycle?
(Sir Edward George) As the world changes, I am sure our view would reflect the changes in the world.
144. The second element of that question is if we could remove this concern the majority of the MPC members have about a sharp fall in the exchange rate at some stage in the future, in your view would that have quite a material impact on monetary policy over the next few months?
(Sir Edward George) If the view about what is going to happen to the exchange rate changed then, of course, that would be a change in the situation; almost certainly it would not be the only change in the situation. I find it very difficult to answer that question. If you told me the exchange rate was going to stay here forever
145. Let us say I did.
(Sir Edward George)and that was the only thing that had changed in the world, then yes of course that would affect our view.
146. You might want to cut rates quite soon.
(Sir Edward George) Possibly we could. I think it is very difficult for you to tell me that is likely to be the state of the world.
147. Governor, we have tried to take you down various A roads this morning but you have stuck to the main carriageway. Can I thank you and your colleagues very much for another enlightening session.
(Sir Edward George) Thank you very much indeed, Chairman. It has been fun as it always is.
Chairman: Thank you.