Select Committee on Treasury Minutes of Evidence


Examination of Witness (Questions 60 - 75)

WEDNESDAY 22 MAY 2002

MR PAUL TUCKER

  60. I have no doubt the Chancellor is delighted you give that answer, but I would like to press you a little further. Would you not see really that there is such an impact from fiscal policy on monetary policy that perhaps you would expand further on your answer just now on demand and perhaps say a little bit more—I would certainly like to hear more—about fiscal policy on consumer spending? We have seen consumer spending have a huge impact on the economy lately. Surely you would have a view on that?
  (Mr Tucker) But on all of these things, feeding into an assessment of aggregate demand, absolutely. I do not disagree with what you say about that at all. Fiscal policy is announced, and one needs to reach a view on how that will affect the economy, alongside what is happening in the household sector, the external sector, etcetera.

  61. May I move on to the global economy. I would be interested to hear you expand your views on global economy, especially the US. We have seen a bit of a rise back in the US economy, but do you think that rise is going to be stable and sustained, or do you think we are in danger of a double dip?
  (Mr Tucker) I think that the bounce-back from the end of last year into the beginning of this year was pretty remarkable and was stronger than most people expected. I think it has a bearing in some ways on some of the uses of the new technology that have been talked about in a productivity context. The way that they have used IT to manage inventories, so that one got a much sharper inventory correction and a shorter slowdown than in the past, is very encouraging about the ability of the American economy to adjust to those circumstances. My own view for a while has been that the path from thereon would be fairly modest. No sharp rise back would be my central view. The reason for that would be that in part the amazing strength of investment during the 1990s raises a question about whether investment will be lower for a while than would otherwise be the case, essentially because people have done the investment already. As I say, that has been my view for a while.

  62. I do not think we have really got there. You are making a very good case for sustainable growth and a longer-term view, but you have not really given me any feeling about whether or not you feel the US may yet have another tumble, because of course that will affect our own economy.
  (Mr Tucker) It is not to be ruled out. There are imbalances in the American economy—household debt, a persistent current account deficit, an accumulated external debt—but I do not think it is the most likely outcome, no.

  63. We did not have quite the usual sneeze or bout of flu that we normally expect when the US have got their own little bit of a cold. What do you think was the main reason why our economy seemed to get through the recent economic turndown better than they did? I am as muddled as your method of speech.
  (Mr Tucker) The consumption of this economy has been tremendously strong, and that has made a big contribution to keeping demand going and the economy moving along. It was roughly flat at the end of last year and the beginning of this year.

  Mr Cousins: By the way, I see that you were seconded to Barings in the early 1980s. Do you have a walk-on part in the book or the film?

  Chairman: Did you write the minutes?
  (Mr Tucker) It was a long time ago.

Mr Cousins

  64. I should think you can remember it.
  (Mr Tucker) The bit of the Barings Group that got into difficulty barely existed, I think, when I was in the bank. I was in the advisory business not in the part of the business that was taking risk.

  65. Very proper. In the answer that you have just given, you pointed to consumption growth as being one of the strengths of the UK economy. In your own answers to our questions you actually state that that has been a deliberate act of monetary policy to correct for weak external demand and a weak contribution of net trade to output growth. Do you think that that can continue indefinitely?
  (Mr Tucker) The question confronting the Committee, I think, is whether the consumption growth will slow of its own accord as the world economy recovers. We have faced a weaker world economy obviously than for some years, and I think the policy of stimulating domestic demand, especially consumption, to keep inflation in line with the target, was the right one. It has contributed to the imbalances that were discussed and raised earlier. The question now is, as I said, whether consumption will slow of its own accord, and I think there are some reasons to expect that.

  66. But if it does not slow of its own accord, the implication of that answer is that you think it should be slowed, if it does not slow?
  (Mr Tucker) Depending on what happens in the external environment.

  Mr Cousins: Thank you.

Mr Plaskitt

  67. You have been in a good position to watch Dr Wadhwani at work over the last few years. Do you agree with his conclusion in his speech on 16 May that monetary policy has been spread too tight?
  (Mr Tucker) I have read his speech very quickly, and it is something that bears looking into very carefully. I would say two things about it: first of all, that the extent to which inflation has been slightly below target is incredibly small, and something that, in some respects, thinking back to previous monetary regimes, would have been regarded as a strong achievement. Having said that, to the extent that Sushil Wadwhani is identifying anything that might be systematic, then that is something that we should learn from, there is no doubt about that. There are all sorts of reasons to think that the economy may have changed over the last few years. The creation of the new monetary framework may be affecting behaviour in the economy in ways that we do not yet fully understand. So the proposition that yes, we need to learn as we go along is one I take completely.

  68. I am just wondering if there is a divergence between his conclusions and your position, because he has argued with us in this Committee, and now in his speech, about the risk of running policy too tight, but you just said a few moments ago in your answer to Mr Fallon that you think the neutral rate for interest rates for the UK economy is between 5 and 5½ per cent. How are those two positions reconcilable?
  (Mr Tucker) I apologise, I am not completely sure that I understand the question. Sushil Wadwhani is arguing, I think, that the Committee should have had looser monetary policy, essentially because he takes a different view on the supply capacity of the economy. I should emphasise, though, that this is not a speech that I have read with the care that it deserves.

  69. So you will perhaps go away and read it carefully, will you?
  (Mr Tucker) Yes, of course.

  70. It pays to be read carefully. It is an interesting speech. Coming back to your answer to Mr Fallon about the neutral rate being 5 and 5½ per cent, anyone in business listening to this meeting or reading the transcript will infer from that that you are likely to be pushing for rates to be higher, because presumably you think 4 per cent is unsustainable in terms of delivering the 2.5 per cent inflation target?
  (Mr Tucker) I think one has to separate two things. The immediate question is whether that is the right rate for now, when the economy is operating slightly below trend. My answer to Mr Fallon, which I should perhaps have brought out more clearly, was that I was talking about some medium-term steady state. I was not in any sense trying to imply where we should be now.

  71. I did not say that. I said it sounds to me as though you will be looking towards getting rates back up to 5 and 5½ per cent, because that is where they have to be to deliver medium term the 2½ per cent target.
  (Mr Tucker) Over some medium term, I think the answer to that is yes. Over what time horizon will depend upon the condition of the economy month by month, and the outlook for inflationary pressures has been pretty subdued of late. The world economy has been weak, investment has been weak, but consumption has been quite strong.

  Chairman: Do my colleagues have any final questions?

Mr Fallon

  72. One small point. I think you are the first candidate I can recall who, from your CV, and it is true of your Who's Who entry, has left out your school. Did you skip that stage or did you just airbrush it out?
  (Mr Tucker) No.

  73. Is it a secret?
  (Mr Tucker) No, of course it is not. I went to Codsall High School in Staffordshire.

Dr Palmer

  74. Pressing you a little bit more on my colleague Mr Plaskitt's question and this adjustment over the medium term towards the trend rate, if current low inflationary pressures continued, would that cause you to revise your view on the natural neutral rate?
  (Mr Tucker) If it persisted, one would be looking at views on the supply capacity of the economy, on the neutral rate of interest, absolutely, yes. These are things that need to be kept under review and I shall keep them under review all the time. In my answer to Mr Fallon I tried to emphasise, and I repeat, the band of uncertainty around this, and I also mentioned that we need to be alert to the fact that the structure of the economy may be adapting itself to a new regime. The other thing I would say is that I tried to emphasise that I was making a point about the world equilibrium rate, which of course is very important to us.

Chairman

  75. Mr Tucker, can I thank you for your appearance today. You said to Mr Fallon that you have not had an opinion in the past five years, and I think you told Mr Plaskitt that you have not read much, so we look forward to your coming back and speaking to us in a forceful, maybe simplistic language, so that we can understand everything. Thank you for your attendance, and our best wishes for your membership of the MPC.
  (Mr Tucker) Thank you very much.





 
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