Examination of Witness (Questions 46 -
WEDNESDAY 22 MAY 2002
46. Mr Tucker, welcome to our confirmation hearing
today. Can I welcome you and congratulate you on your appointment
to the MPC and perhaps start with the question asking you that
I know that you have been involved in producing the Minutes for
the MPC for the past number of years, so that gives you real inside
knowledge probably about that. Do you think your inside knowledge
of the views and the relationships on the MPC will give you an
advantage when you join?
(Mr Tucker) I am not sure that it will
give me an advantage. The fact that I am familiar with the process
and the fact that it will not be a completely novel experience
for me to be in the room might make me feel slightly more comfortable
than I personally would feel otherwise, but I think there is a
world of difference between being in that room taking objective
notes, concentrating on providing a true and fair view of what
has occurred in a discussion amongst other people, and being a
participant in that discussion. Whilst, on the one hand, I would
like to think that I have benefited from working in the Bank close
to monetary policy in a variety of ways over recent years, I most
certainly do not under-estimate the step change that I am about
to go through in forming my own judgment each month.
47. You have been 22 years with the Bank and
for only two of those years you have been involved with monetary
policy. What answer do you have to the critics who may argue that
you have an insufficiently strong background in economic analysis
compared with your MPC peers?
(Mr Tucker) More than two years involved in monetary
policy. Two years running a part of the monetary area, which I
was asked to do by the Governor, Mervyn King and their colleagues.
They showed faith in me in that and they are quite robust individuals
in their judgments and I feel comfortable that I have learned
a lot from that experience. My career over the past dozen years
or more has involved me in a variety of ways with monetary policy.
When I was conducting the open market operations on behalf of
the Bank when the Government was setting interest rates, this
was a job where I had to follow monetary policy carefully; and
when I was a speech writer, amongst other things, in an earlier
part of my career I needed to follow monetary policy. I would
like to think that in a variety of ways I have picked up relevant
experience and I feel comfortable with that.
48. So you are an insider, you have been there
man and boy, what was the last interest rate decision of the Monetary
Policy Committee that you disagreed with?
(Mr Tucker) Your question assumes that I have been
tracking monetary policy decisions each month, forming my own
view on whether this is right or wrong, and what I would have
done. I think in the context of writing the Minutes it is quite
important not to do that, and I have not done that, since what
one has to do is follow and understand the arguments of all the
members of the Committee. That is why in my response to the Chairman
I was saying that this is a change, and I recognise it as being
a change, from reporting the views of others to reaching my own
49. Over the last long five years you cannot
remember or identify a single MPC decision that you disagreed
(Mr Tucker) My answer to you was that I was not going
from month to month saying "I would have voted this way,
I would have voted that way". I have certainly followed the
analysis and formed views on how I would have conducted the analysis
and I think I contributed to that analysis over the years.
50. Has there been a very recent decision that
you disagreed with that is fresh in your memory?
(Mr Tucker) My answer is the same, I am afraid. I
am sorry if I disappoint you. What I will need to do going forward
is reach a view on what I think is right having listened to the
debate amongst colleagues and looked at the information.
51. You are coming at this from the inside and
people are bound to be somewhat suspicious that you are, as I
said, the ultimate insider, that you are not ready to take an
independent view of this. I just find it very surprising that
you cannot identify a single decision over five years that you
yourself thought was wrong one way or the other.
(Mr Tucker) I think you should have no doubt on the
point of reaching my own view, and there are two reasons for that,
amongst others perhaps. The first is that the statute makes it
absolutely clear what the responsibility is. The responsibility
is one person and one vote, and that is a duty. The second thing
is that you join a public policy institution because you want
to be involved in public policy, and if you are lucky enough to
get to the position where actually you can be one of the decision-makers,
you do not throw that off in any light way. I shall form my own
view each month on what I think the level of interest rates should
be, you should have no doubt about that.
Chairman: I am sorry, you hear the Division
Bell has gone. I will suspend this sitting for ten minutes.
The Committee suspended from 4.26 pm to 4.36
pm for a division in the House.
52. In your own answers to us you refer to "the
greater the imbalances in the economy become, the greater the
risk of abrupt adjustment", I think is your phrase. Given
the current imbalances which may have a longer-term effect, should
you also consider the RPI-X projection beyond the two-year horizon
setting monetary policy? Do you think that two-year horizon is
now rather limiting?
(Mr Tucker) I do not think that the two-year horizon has
been, or more to the point for me should be, the single fixed
point on which the Committee focuses. It should be looking at,
and I should be looking at, the profile of inflation throughout
the two-year period andwhich your question gets towhat
is implied thereafter by the slope. I think that the weight that
one gives it as one pushes out in time beyond two years has to
get somewhat less for perhaps two or three reasons. First of all,
the band of uncertainty around it becomes greater just because
predicting the future becomes harder the further out you go. Secondly,
the projections are done, of course, on the basis of a constant
interest rate assumption, and whilst that is convenient, I think
the sensible assumption to be made in terms of using these projections
in policy-making is it becomes a more difficult assumption to
make the further you push it out. So my answer to you is yes,
but qualified in terms of the weight. Certainly I do not think
it is a question of if you hit 2½ per cent two years on you
are fine, irrespective of what the slope is or the inclination
53. What do you think the neutral rate is for
UK interest rates?
(Mr Tucker) That is a good question, if I may say
so. I would have thought
Chairman: You may say that!
(Mr Tucker) It is an important question in terms of
making monetary policy, because in a world with price stickiness,
part of the way in which monetary policy works is to shift the
short-term real interest rate around, above or below the neutral
rate. I would have thought at the moment somewhere in the area
of 5 to 5½ per cent, but this is a hazardous thing to judge
and it is based on ex-post world interest rates. I emphasise the
band of uncertainty around that, and it is the kind of view which
one needs to update as one gets more information.
54. In your submission you argue that the MPC
has created risks by increasing domestic demand to compensate
for weak external demand. Is the risk of further imbalancing the
economy going to be a restraint on your decisions when you are
a member of the MPC?
(Mr Tucker) I think that there is no doubt at all
that the imbalancesand I tried to set out three ways in
which these imbalances manifest themselvesare a complicating
factor in policy-making, yes. However, I do not think addressing
those imbalances can be the objective of policy in some
way. The objective of policy is to maintain stable inflation around
or at the target in the medium run. It is the case, in my view,
that the longer the imbalances persist, and to the extent that
they grow, the uncertainty about the path of inflation looking
further out is increased, and that makes policy-making a more
55. Could I refer you to the answers you gave
us in your submission, answer 13a?
The question, for the record, was "What weight do you place
on a) the monetary aggregates . . . in your assessment of inflation
prospects?" Could you actually explain what the answer means,
because I find it extremely obscure?
(Mr Tucker) Then I apologise. The point
I was trying to make, which I think is an important one, is that
inflation is a nominal thing, in the sense thatI am probably
not doing very well again, I am afraid, and perhaps repeating
my wordsto keep the economy in balance in real termsreal
demand in line with real supplywould tend to produce a
stable rate of inflation, but it will not of itself deliver the
stable rate of inflation that you want. It could be 2½ per
cent, it could be 3 per cent, it could be 1 per cent. Therefore,
what one has to do, I believe, alongside examining the real economy,
is to look at the rate of expansion of nominal variables and the
variables expressed in terms of money. In the past, and in some
other countries, the monetary aggregates, broad money and narrow
money, have been a principal way of doing that. This is only feasible
in circumstances where one has stability in the relationship between
the monetary aggregates and between output and inflation, and
this country has not been in that position for many years. So
what I was then trying to go on to point out was that if one cannot
calibrate these things from monetary aggregates in such a precise
way, what other purely nominal measure is there which can held
guide policy-making? I picked up, which I believe to be important,
inflation expectations, and by that I mean the public's inflation
expectations, people on the two sides of the wage bargaining process.
We can get measures of inflation expectations from surveys and
from the bond markets. These are fallible, but they should be
given some weight.
56. Those answers, both the written answer and
the oral answer you have just given, give me the impression that
they would go down very well in a symposium of bankers, in your
own fraternity, but they would be far less transparent to the
public at large. Are you going to be able to break out of that
sort of world and explain how you have arrived at your decisions
as required on the MPC?
(Mr Tucker) I hope so. What I would say,
I think, is that this is a different set of circumstances perhaps
from this, but I would say inflation is, at the root of the problem,
too much money chasing too few goodsand therefore one needs
to track the rate of growth of money. That is point one. Point
two, I would say that we are trying to achieve the inflation target
of 2½ per cent not just in some short term but also further
out. That is what the job is in serving the public, and therefore
we need to take account of what the public think inflation is
going to be further out.
57. Could I refer you to question 14 of your
The question was: "To what extent should fiscal policy play
a demand management role alongside monetary policy in the short-run?"
In response you say, "The most important contribution that
fiscal policy can make to monetary stability is to maintain a
prudent level of government debt". That does seem like a
banker's answer, considering that the balance of monetary and
fiscal policy is one of the crucial issues, is it not, of the
Monetary Policy Committee and the Treasury?
(Mr Tucker) The reason I emphasised that
pointand I do believe it to be importantis that
the experience internationally is that when the level of government
debt rises and questions creep in about whether the Government
can sustain that debt, then people start to expect that that level
of debt, the real burden of that debt, will be inflated away,
that the credibility of the monetary policy process, whatever
it is, becomes impaired. Mostnot all, but mostof
the big inflation problems around the world have been rooted in
one way or another in that, and therefore I do think it is important
that the Government, any government, should have a prudent debt
policy, which we have.
58. If you were explaining that to a sixth-form,
say, would you use the same language as you have just used or
which you used in your written answer?
(Mr Tucker) The language I would use
then is that if you owe money, you would like inflation to reduce
the value of that money so that you could repay it more easily.
59. I would like you to stick with the sixth
form, if I may. I notice that in your answer to question 3 of
the questionnaire you seemed somewhat proud of synthesising macroeconomic
financial markets and banking information systems. I am wondering
how far your view of synthesis goes? You also have very clear
views, do you not, about the Government's role in fiscal policy
and the MPC's own role? Do you not see any role at all for the
MPC to be pressing for further co-ordination between the fiscal
and monetary roles?
(Mr Tucker) I think that the important thing is that
the various different agencies do their jobs and we do not get
into the business of commenting on other people's jobs. That is
quite important. One of the advantages of the current setup is
to have the Bank of England and the Monetary Policy Committee
focussing on monetary policy and keeping inflation at the target,
rather than trying to do, or comment on, lots of other things
at the same time, and I think that is a real strength in the current
setup. Where I completely agree is that fiscal policy has an important
effect on demand in the economy, alongside what is going on in
the household sector (consumption), the business sector (investment),
and therefore that is something which we of course need to take
into account and understand. The arrangements that we have with
the Treasury allow us to gain an understanding of what it is that
they are doing, but of course they publish virtually everything
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