Examination of Witnesses (Questions 120
THURSDAY 13 JUNE 2002
120. Did the other members of the Monetary Policy
Committee know after the meeting that took place in May that when
you made the statement about the decision of the Committee that
you would include that sentence, that the Committee stands ready
to counter building inflationary pressures?
(Mr King) No, but I would not be surprised if they
would have expected it to be there, because it was, of course,
the final sentence of the Overview agreed by every member of the
Committee. It would be rather odd if I had omitted it.
(Sir Edward George) If you look at page (iv) you will
find it is written there.
121. Can I suggest, Mr King, that when you look
at the overall tone of the comments that you made on Wednesday
15 May in your Inflation Report press conference, they very much
focus on the upbeat elements in terms of growth and the risks
in terms of inflation as opposed to the concerns of those MPC
members who were more worried about the growth outlook, and are
you concerned therefore that at these press conferences there
may be a danger that you are putting your personal gloss on the
views of the MPC rather than representing the views of all the
(Mr King) No, I am not worried about that at all,
because I am quite conscious of the fact that I am there speaking
on behalf of the Committee. I have made that clear to the press
when they ask questions. Sometimes people do ask my view and I
refuse to give it. I say, "I am here to present the Inflation
Report." I challenge you to demonstrate in any way at all
that the tone of my comments at the press conference was different
from that in the Inflation Report.
122. You only have to pick up the main points
that run through your statement on that day: that it "looks
increasingly clear that the trough of the recent slow down was
towards the end of last year", "signs of revival of
the world economy have become more widespread", "consumption
remains buoyant". I suggest as an example that if you take
the second to last paragraph of your statement at the press conference,
which starts, "Since February, signs of recovery. . ."
and compare that with what is actually in the Inflation Report
itself, the tone is very different. The tone is much more about
growth picking up, prospects being good, the inflation projections
at the end of the period being higher than the 2½ per cent.
It is much more in terms of the risk, is it not?
(Mr King) Mr Laws, that is complete nonsense. If you
actually look at the last paragraph of the Inflation Report overview
at page (iv) and look at the penultimate paragraph of my comments,
which was the last substantive paragraph of my introductory comments,
they make exactly the same point.
123. They do not really. Look at the second
to last paragraph.
(Sir Edward George) Chairman, I really do think this
is going beyond a joke. No member of the Monetary Policy Committee
has every complained about this. If anybody was going to be sensitive
about this, I suspect it would be them.
Chairman: There are two external members
here. I suggest we ask for their comments.
124. Before we move on, Mr King has made a speech
recently about the Monetary Policy Committee in which he points
out precisely that there is a tension between expressing a single
view on behalf of the MPC and the individual views of MPC members.
If I can quote from the speech, you say, "The avoidance of
confusion requires some forbearance by individual members of the
Committee." So you acknowledge yourself that there is a tension.
(Mr King) I think it is obvious that if you have a
collective decision-making process, you need to have some forbearance
on the part of all those who take part in it, and that is exactly
what we have had. If on the day the minutes came out every member
of the Committee were to stand up and say, "This is my view
and this is the other view," that would not be terribly productive,
but that is not what members of the Committee do.
125. Can I put a final question to Mr King?
Can you reassure us that your reticence, as a known inflation
hawk and a warrior about this particular point of the pound coming
down and causing an inflation problem, in voting for a rate rise
at recent meetings is not in any way connected with the fact that
you are one of the leading contenders to be the next Governor
of the Bank of England?
(Sir Edward George) That is an extraordinarily cheap
remark, if I may say so.
(Mr King) The cynicism of politicians is not something
you should necessarily visit on everyone else. I will give you
a total assurance, and I look forward one day to an apology in
126. I would invite Kate Barker and Stephen
Nickell to respond, and then we will move on.
(Ms Barker) I would like to give Mr King some considerable
support here. I think that he does a particularly good job in
presenting the views at the conference. I agree with the comment
that I do not envy him. The fact that I go to fewer press conferences
is to me one of the pleasures of my job. Press conferences are
not always easy sessions. All members of the MPC face difficulties
when we are talking. Sometimes we have to represent the views
of the Committee and sometimes we have to represent our own views.
I myself, when I go out to speak to business audiences, for example,
before the minutes when the votes are not known, am advised on
those occasions, as indeed we are this morning, to talk simply
about the views of the Committee and not my own views. It is a
tension, but we all do our best to do it, and Mr King does his
best to do it when he is presenting in the press conference, and
I do not express any reservations about the way in which he goes
about it. It is up to us, after all, to make sure the Inflation
Report is our document, and that the views which we have and the
differences which exist in the Committee are expressed, as they
are in chapter 6 this time; they are there clearly, and these
differences are transparent, for everyone to see, and Mr King
represents the consensus of the Committee at the press conference.
(Mr Nickell) I have no problem with Mr King's interpretations
of what the Inflation Report says in his press conference. The
most important thing is that if particularly external members
wished to make comments on more or less anything where we have
our own particular views, we are perfectly at liberty to express
them, and we do.
127. A quick follow-up on the recent voting.
Governor, you gave a speech in April in which you said, "The
Committee has been divided in its forecast and policy voting more
often than not since we started. This is both natural and healthy."
Are you worried that the last seven months have been both unnatural
(Sir Edward George) No. Even within the last seven
months there are differences of degree. Throughout the period
the differences have been really much narrower because of the
transparency, and that is why I think it is very healthy. Those
differences attract attention. You can see in the minutes that
there were differences even when people voted in the same waydifferences
of emphasis, differences of view about what might happen and that
sort of thing, but not big enough differences on those occasions
to actually cause them to vote differently from the majority.
128. So unanimity can be healthy as well?
(Sir Edward George) We are bound to run into periods
of unanimity. They are not the most likely outcome, but they are
a natural part of the process.
129. How much comfort do you think we should
take from the strong growth levels of the United States economy
in the first quarter, when in the Inflation Report you say, "Low
levels of capacity utilisation. . .are likely to restrain private
company spending in the short term." What are the implications
of this lack of investment for the longer term prospects for the
US economy and are you concerned about this?
(Sir Edward George) Yes. I think the picture that
we have of the United States economy is that the first quarter
balance was driven by the stock cycle, and it would not be sustained.
I think that is fairly clear. Some people took it as evidence
that the US economy was off to the races again. That has never
been our view. Our view was that that was an exaggeration, that
we would see a slowdown as the impact of the change in the stock
cycle, a slowdown in the rate of growth that is, and the other
common characteristic is that because consumer spending has remained
so robust, even through the slowdown of last year, that was not,
as is more typical in recovery phases, likely to be a driver of
added growth, and therefore the issue is what is going to happen
to investment spending, which we never expected would be strong
in the first half of this year, but is what everybody is looking
to for the second half of this year, going into 2003. It is always
a question that if you are anticipating this, you can never be
certain that it will appear. I think there are good grounds for
expecting it to occur. One of the remarkable things about the
United States is that the productivity data have continued to
be very strong through this slowdown, and on that basis, I would
expect, once the investment overhang has been worked off, that
you would see new investment, because there was clear evidence
of productivity growth which would produce the returns on the
investment. I think there has been that kind of evidence in some
of the ICT areasnot telecommunications but the computer
area. We have seen that pick up, and indeed, that has had an impact
globally really on strengthening the electrical sectors, including
recently here. So I think there are grounds for taking the view
that we will see the pick-up in investment later in the year,
but until we actually begin to see it in harder evidence, it is
an uncertainty, and I think that is the big uncertainty about
the US economy and therefore about the global economy. The other
factor which is relevant to the US situation is that although
most of the economic analysis, whether you are talking about the
IMF, the OECD or market commentators or the FED or ourselves,
is broadly on the lines that I have just described to you, but
there is undoubtedly a kind of disconnect between the economic
analysis and business sentiment in the United States, particularly
among large businesses as far as one can see. That is reflected
in the weakness of equity markets, and so that poses a question
about this, and I think it is to be seen. We do not understand
the financial market weakness that we are seeing at the moment.
You can tell lots of stories about it. One of the stories is the
governance issues and the accounting issues that have been raised
by ENRON and a series of other instances, which may be having
a broader impact on not just financial market confidence but business
confidence in valuations and therefore future profitability growth.
Another story you can tell is about the lack of pricing mobility,
which says the economy may continue to grow but profitability
will not be what you would have expected from past experience.
So there is uncertainty about it, but our view is consistent with
the view of most of the economists, and we just have to wait and
130. So we do not need to be concerned that
the United States recovery is sustainable?
(Sir Edward George) We think that recovery will not
be the bounce that we saw, but it will be a gradual, fairly modest
recovery, picking up to around trend growth in the United States
by the end of the year, trend growth being 3 per cent plus a little
bit. We think that is the most likely outcome.
131. Could we move to your statement on sterling.
In the MPC minutes for May it says, "It was notable that
the euro strengthened against the dollar at a time when the US
economy appeared to be growing more strongly and against a background
of political uncertainties in the euro area. This suggests a possible
change in market sentiment." What sort of implications might
that change in market sentiment have for sterling in the near
(Sir Edward George) In the recent period, precisely
the converse statements you could have read last year. The US
economy was slowing down much more dramatically than the euro
zone, yet that you would have expected to have caused the dollar
to weaken but it did not; it strengthened. Now we have seen a
change in that, and it has become fairly persistent but gradual.
I do not think we understood it last year and I do not think we
understand it this year, which is why we get paid what we do,
because we do not know these things, even though it may be our
job to try to anticipate them. If you look back over past experience,
these things can go on for a very considerable timeyou
do not understand whyand then sentiment changes, and then
they persist again for a considerable time, and the strength of
the dollar against the euro started in about 1996-97, and we have
not really understood it since then. We have had explanations
at times, but they seem to have changed. So it may be that we
are seeing an adjustment to the past puzzle and it will take time
to work itself out. If that were to happen, I think we would probably
be somewhere in the middle. Actually, during the recent period,
we have come down more with the dollar than perhaps one would
normally expect, and there could be particular reasons for that.
But if you look over the last few days, that appears to be less
132. What are the implications of this for the
inflation projections over the next couple of years?
(Sir Edward George) They are quite considerable. If
the story we are seeing now is the beginnings of a persistent
sustained strengthening of the euro against currencies generally,
and if within that we strengthen against the dollar, which a lot
of people would think was quite likely, the effective exchange
rate will not weaken hugely. It will weaken because the euro is
weighted more heavily in the effective exchange rate. It is the
effective exchange rate which really feeds into the inflation
projection. If on the other hand we were to weaken against everything,
that would have a more powerful inflationary impact than the situation
I have just described.
133. How important is this possible fall in
sterling in relation to alleviating the imbalance between the
tradeable and the non-tradeable sectors of the economy?
(Sir Edward George) On the pattern I have described,
where the euro strengthens and we moderate against the euro but
not by as much as the dollar, so we strengthen against the dollar,
it would obviously improve the situation of the sectors that are
exposed to the euro zone, competing with or trading with, but
worsening in relation to the sectors trading or competing with
the United States or dollar-based economies. It would be a more
balanced picture, but on the whole, because the euro zone is such
a huge weight in our external trade, and in the effective currency
calculation, the weakening of sterling is welcome in the sense
that it actually would contribute to a reduction in the imbalances,
provided, as I said right at the beginning, we then moderate the
growth or see a moderation in the growth of consumer spending
and domestic demand.
134. Could it be enough in itself to redress
the imbalances altogether?
(Sir Edward George) No. It will be a factor but I
think a more powerful factor will be the strength of the global
economy and therefore the demand impact rather than the price
impact through the exchange rate.
135. Is there any evidence that these imbalances
have started to unwind or have they got worse in recent months?
(Sir Edward George) No, I think on the data they have
136. So if they have got worse, what is the
likely outcome of this? They cannot keep on getting worse, can
(Sir Edward George) No. If you are looking at the
external imbalance, to a degree, it is self-correcting, in the
sense that, if we are not financing the deficit that is emerging,
the exchange rate will weaken, and indeed, that is presumably
an arithmetic explanation of why the dollar is weakening. Capital
in-flows into the United States have moderated and that means
they are not financing the external deficit, the current account
deficit, and therefore the exchange rate has softened, and that
will be moving in the direction of helping to reduce the external
deficit, but it is only one factor among many, and probably not
the most important factor, either for the United States, which
is not as exposed as we are, or even for us.
137. If that were going to be the mechanism
of unwinding, there have been two years when that could have equally
happened. Why would it be more likely in the next two years than
it has been in the last two years?
(Sir Edward George) That is what I say; we did not
understand why the dollar strengthened when the US economy was
slowing down. You can give the arithmetic explanation that it
was because capital flows were still going into the United States,
and more than financing the current account deficit. We did not
understand that, and that is why I talk in terms of the fact that
often you get a change in market sentiment which reduces the capital
flows causing the puzzle in the past, and the exchange rates moderate
in response to that.
138. Is it not looking likely that when these
imbalances are unwound, the process is going to be somewhat turbulent,
not at all smooth?
(Sir Edward George) That is the big issue. Over time
it will be like house prices. The imbalances cannot continue to
increasethe international imbalances we are talking about
nowfor ever. That is absolutely clear. The issue is just
how the correction of those imbalances or the moderation of those
imbalances comes about. It could come about in a dramatic, crash
way, or it could come about in a gradual way. Up until now what
we have seen has been pretty gradual.
139. What would be the expectation of the MPC?
Is it that the turbulent way is more likely than the smooth way?
(Sir Edward George) No. The way in which we factor
this into our forecast is that we make an assumption about the
changes in exchange rates, which is influenced by relative interest
rates, so that we have a measure of what is likely to happen to
the exchange rate based upon uncovered interest rate parities,
and we put our expectation for the exchange rate halfway between
what that would suggest and an unchanged exchange rate. But it
is simply an assumption that we use for the purposes of constructing
the forecast. Around that we will have views and I think the views
of a sharper downward correction would be more likely. There is
a downside risk to that forecast built into our forecast, and
that of course is associated with the upside risk in inflation.