Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 20 - 39)



  20. So you do not really agree with Mervyn King's view on this issue?
  (Ms Bell) I am not aware that what I have said amounts to a big disagreement.

  21. It does really. When he came to see us recently he clearly felt that at some stage there would be a big drop in the pound, that was very likely, and therefore we should err on the side of tighter monetary policy now to take that into account. That was the difference between him and Dr Wadhwani.
  (Ms Bell) I would not like to forecast when a fall would happen and how dramatic it would be but I would agree that there could be inflationary risks once the fall happened.

  22. And you are aware of that debate within the MPC?
  (Ms Bell) Yes.

  23. Last question. Do you think that the current level of the pound against the euro, which the Governor has himself described as the pound being over-valued, is a barrier to us going into the euro in the near future?
  (Ms Bell) I think once the Government reached an assessment of whether or not we were going to go in and got approval from the country then it would be appropriate to look at the exchange rate and perhaps bring about some sort of adjustment. I think it is premature to have that debate.

  24. But the Government would not hold a referendum unless that decision had been made, would it?
  (Ms Bell) I am not aware of that.

Mr Tyrie

  25. You have referred in your questionnaire answers to the suppressed level of debt service costs. I wonder whether you have a view on how you think the debt overhang, the level of household debt is going to unravel, and whether it is sustainable?
  (Ms Bell) I think it is probably sustainable at current interest rates, the worry is a continued rise in it and whether, if it did unravel, that would be rapid and have adverse consequences for inflation and output and that would have to be monitored.

  26. Have you got a view on the probabilities of a rapid unravelling?
  (Ms Bell) I would not consider it to be a high probability at the moment but you can imagine a situation where it could become a higher probability if, say, unemployment was to rise markedly or interest rates were to rise markedly. I think in the current situation disorderly unwinding is perhaps not the most likely outcome but it is obviously something that has to be watched and monitored.

  27. And the relationship between that and asset price inflation, house prices?
  (Ms Bell) Clearly the debt is to some extent feeding house price inflation.

  28. Exactly. So you are expecting at some stage either a slow or a quick adjustment, but an adjustment, to house prices?
  (Ms Bell) I am not sure about prices but perhaps the rate of growth.

Mr Plaskitt

  29. We have had Dr Wadhwani's reflections on his term on the MPC and he concluded in a lecture he gave on 16 May "The MPC has had a tendency to produce inflation forecasts that have been uniformly higher than the actual outturn". Do you agree with his conclusion?
  (Ms Bell) I read the speech and I think his analysis is sound and it is actually a similar conclusion to one that the Bank of England themselves had reached in their Inflation Report in the previous August.

  30. So you think his conclusion is sound?
  (Ms Bell) That there has been a tendency, yes, that inflation has tended to come under, and growth over, the forecast.

  31. It is interesting that you say in your written submission to us that "Purely model based forecasts should be supplemented by judgment". Given that you agree with Dr Wadhwani's record on that, will you continue his work on trying to get the model changed so that we do not get this misalignment that he is talking about?
  (Ms Bell) I think it is a mistake to look at just one model. The Bank of England, I believe, uses a whole range of models. My understanding is that the forecasts in the Inflation Report are not the outturn of just one model. If for any reason the model is responsible for forecasting errors then that is obviously something that not just the MPC but the whole Bank and their economists ought to be keeping under review and trying to understand the reasons for the errors. I have to say that there is a difference in the assumptions which I do not think Sushil really unwound in his speech in that the published forecasts for inflation are based on unchanged interest rates and clearly the outturns are based on what actually happened to interest rates.

  32. What do you make of the exercise that he ran through in his speech where he went back and ran the model, if you like, with base rates of 0.25 and 0.5 lower than they actually were and drew the conclusion that they could have been there and would still have delivered the inflation target but also higher growth. Do you accept his argument?
  (Ms Bell) As far as it goes I do. I think he himself in the speech described his simulation exercise as naive, that he just dropped interest rates by 25 bases points throughout whereas if you were really trying to say what would have been optimal policy you might have done something different. I did not see in his results that he had looked at the path of inflation, I think he just looked at the average level of inflation and I wonder what would happen if you looked at the path.

  33. I have just got one more question. In your written submission to us you said, and I quote, "I believe it is extremely important for monetary policy to be subject to democratic parliamentary scrutiny". Do I take it, therefore, that you would not support a central bank that did not have any democratic scrutiny applied to it?
  (Ms Bell) I think monetary policy is an extremely powerful tool and very important, so I do think that it should be something—it is clearly something that in a democracy Parliament will have an interest in.

  34. So you would be critical of the structure of the European Central Bank in this respect, which is not subject to parliamentary scrutiny?
  (Ms Bell) It is subject to European parliamentary scrutiny.

  35. You said "parliamentary scrutiny" in your document to us.
  (Ms Bell) Yes.

  36. It is not comparable to the scrutiny that we given the MPC here, is it?
  (Ms Bell) No. In the larger European Union it is diluted, yes.

Mr Ruffley

  37. In your answer to our questionnaire you said "Consideration should be given to asset prices only in so far as they affect the prospects for the targeted inflation rate . . . The creation of an asset price bubble could also have implications for inflation in the event of a disorderly correction."[1] Could you briefly tell us how you would define an asset price "bubble"?

  (Ms Bell) I am not sure that it is a term I could precisely define but I would say it is when it becomes self-feeding so that the prime reason for purchasing an asset is expectation of a return rather than with a house where you might get some user value out of it and then the price begins to grow very rapidly.

  (Ms Bell) Do you think there is any evidence that such a bubble exists now or is likely to exist in the short run in the UK housing market?

  (Ms Bell) I have to say I am not sure. I suspect not.

  38. Not?

  (Ms Bell) Yes.

  39. Could I put it to you, given the risks of a disorderly correction, to use your words, resulting from an asset price bubble, would you place greater weight on such a bubble should it arise in the light of your answer to our questionnaire when you were talking about consideration given to asset prices?

  (Ms Bell) I would still be of the view that interest rates have to target the overall level of inflation and not inflation in any particular asset market.

1   Ev 2, para 8. Back

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