Examination of witness (Questions 60-79)|
TUESDAY 1 MAY 2001
MS KATE BARKER
60. Given that NAIRU is a bit of a will-o'-the-wisp
and people talk about it but nobody knows where it is, is it really
a useful concept?
(Ms Barker) It is a useful concept in so far as it
is absolutely right when you are sitting down taking a decision
on monetary policy to ask yourself the question "What is
the state of the labour market? Is it such that the rate of wage
growth is likely to be increasing or decreasing?" I cannot
imagine sitting down to have that conversation without thinking
about that. If you were to ask me do I think it is right to have
in my mind for all time a figure such as five per cent, 5.2 per
cent, seven per cent, any of the figures that people have set
forward as the NAIRU, and think that will apply always I would
argue absolutely no, I do not think that would be right.
61. Could you ever pin it down or refute it
by empirical means?
(Ms Barker) Refute a particular level?
(Ms Barker) Yes, it is certainly possible to refute
a particular level.
63. Or the concept as a whole?
(Ms Barker) No, I do not think you can refute the
concept as a whole. In a relatively trivial sense there is clearly
always going to be some low level of unemployment at which if
demand increases any more there would be upward pressure on wages,
unless you had a controlled economy in which you never allowed
anybody to ask for wage increases.
64. In response to question nine you say that
you do not regard an average inflation rate over two years of
two per cent as a failure by the MPC to achieve its key objective.
Likewise, you would not regard an average of 2.9 per cent as a
failure. Would it be correct, therefore, to say that your interpretation
of the remit is to keep inflation at anywhere between two and
three per cent?
(Ms Barker) No, I would not say that. I thought quite
hard about the answer to that question and the way I phrased it
was to try to make clear the strong commitment to symmetry. I
think I added that although inflation had been lower than target,
on the whole there were not many signs that it was on a downward
trend and, equally, I qualified the comment about 2.9 by saying
I would feel differently about 2.9 if it was clearly on an upward
trend. It is right when you look at a period such as we have just
had when inflation has been running below trend to look at the
factors that have come along and ask if there have been special
factors that, as it were, have been difficult. I referred, I think,
to the continuing and rather perplexing strength of the exchange
rate as being one of these factors that perhaps accounts for why
inflation has not been at the target. In the sense of what you
are trying to achieve, it is right that you set out to achieve
the target but it would be pretty difficult to hold the inflation
rate at 2.5 per cent in every month.
65. Do you genuinely feel that there is symmetry,
so that you are no more anxious about the turn out being above
2.5 than about it being below?
(Ms Barker) Personally I think symmetry is important.
We have come out of a very long period, nearly all of my time
spent as a working economist, in which the great thing that has
worried us all has been inflation. However, I do not think that
should make any of us forget that there is also the prospect of
deflation. Once you have adjusted 2.5 per cent for some of the
technical errors in measuring inflation, it is not a terribly
high inflation rate. If you were to drift too far below it then
you might start to become worried about deflation. In that sense
I think it is absolutely right to operate the target absolutely
66. Do you consider undershooting the inflation
target for the last two years, and possibly continuing to do so
for the next two years, as a policy success?
(Ms Barker) I think I said this in my answer, I do
not suppose the MPC set out to undershoot the target. In that
sense they can be said to have failed but I would not regard it
as a serious failure. It has certainly not brought us into territory
where I start to be worried about deflation.
67. There has been mooted some idea it would
be beneficial if our target was consistent with similar inflation
targets in Europe of two per cent. Would you subscribe to that
(Ms Barker) No, I would not subscribe to the view
that I would want to change the target while we are measuring
it on the basis of RPIX. There are two differences between the
inflation rate that is used in Europe and the one we use here.
One is that we use an arithmetic mean here rather than geometric
mean, I think this averages out at about half a per cent difference
between the two numbers. The other difference is that housing
costs and certain other things, but mostly housing costs, are
less well accounted for in the European inflation rate. We know,
of course, that our own HICP is considerably lower. I think while
you are using RPI, RPIX at 2Ö per cent is the right target
to stick to. As I said in my answer, I do not think just because
you have been undershooting it for a period it is an argument
for lowering the target any more than if the MPC had been achieving
an inflation rate at average three per cent would be a reason
for raising it.
68. Would there be any benefits in trying to
harmonise inflation targets with the European Union?
(Ms Barker) In terms of the two differences I have
talked about, I do, as a matter of fact, personally think, as
many people do, that it might be preferable to use a geometric
approach to the recalculation of inflation. I do not, however,
consider that in the context of the UK where housing plays such
an important part that harmonising with an index which does not
give quite the right weight to housing cost would be right. The
European Union, of course, is always moving to improve the target
and it might be that is something that is right in the future.
I would just like to restate something which is that I think one
of the good features of the new system which we have had since
1997 in the UK is we have had one inflation target and stuck to
it and it has worked quite well. I personally would quite like
to stick to it for a few more years yet in its present form.
Sir Michael Spicer
69. Just one very quick question, a supplementary,
if I could, on the question of symmetry. I wonder whether you
might feel sometimes one is a bit glib about this idea that symmetry
is a good thing. Why should it be as bad to wipe out inflation
as it should be to have rising inflation? Why should symmetry
be a good thing?
(Ms Barker) I think the reason that I mind about symmetry
is straightforwardly to do with the dangers of deflation. There
are well known costs to having inflation but they do not really
start to operate at around the levels we are talking about. There
are, however, very considerable disadvantages to deflation. I
think there are serious risks if you have a target so low that
any divergence below it would start to move you towards deflationary
territory. It is in that sense that I think it would be wrong
to not operate this target symmetrically.
70. You would accept that any inflation is a
measure of various parts of the economy or economic performance
being incompatible with each other. It is a measure of blockage,
it is a bad thing in inflation, any inflation?
(Ms Barker) No, I do not think I would necessarily
regard any inflation as being a bad thing. In certain senses we
all know that prices and wages sometimes tend to be stay down
as people do not like cutting their prices and wages and so generally
a low level of inflation which allows relative price adjustments
to go on across the economy, some things to become more expensive
relative to others, is thought of as a reasonably good result.
71. On exchange rates, do I understand in recent
years your view has been sterling is over valued and that this
is a temporary thing and will correct eventually, albeit the temporary
period has lasted longer than we thought?
(Ms Barker) I do think that sterling has been over
valued in the sense that it has been running at a rate certainly
against the euro, of course, and in the early part of that period
the deutschemark, which has made it very difficult for companies
exporting into that area. I think if you look at what has been
happening to investment in manufacturing or margins of companies
exporting there is clear evidence that is true. In that sense
the data opens up some longer term worries about trade deficit
sustainability, long term sustainability of growth. I would like
to say, I am sure I have argued, and I am sure I have always given
all the caveats to it, that I therefore was convinced that sterling
would at some point fall back. But, of course, it is perfectly
possible that sterling will not fall back and that the economy
will adjust to this new level. My view obviously, since I believe
it is over valued today, would be that there would be costs of
72. Does that mean you have changed your view
on that last part of my summary, that you no longer think sterling
is going to fall back in value?
(Ms Barker) No. I still, on the whole, think it is
more likely that sterling will depreciate against the euro over
the next couple of years than that it will rise. I have to say
I do not hold that view strongly, I do not think any economist
ever holds a view about exchange rates very strongly.
73. In your answer to question 18 on the questionnaire,
you say it is impossible for the MPC to have an exchange rate
target as well as an inflation rate target. Why is it impossible?
(Ms Barker) I think the most direct reason is sometimes
the two may conflict with each other and in that case it would
then be impossible to set interest rates to achieve the target.
It is also true, of course, if you were to have only an exchange
rate target, I would have to say your chance of achieving it would
be rather remote and there is a great deal of uncertainty between
what happens to interest rates and what happens to the exchange
rate, but the more important reason is simply that the requirements
of the two will quite often diverge and it will simply be impossible
to meet them.
74. If we talked about a different language
and objective for ameliorating the worst effects of an over valued
or an under valued currency, would that be a reasonable objective
for the MPC to have?
(Ms Barker) No, because I think that would still,
at the limit, bring you up against the same difficulty. You would
then be left with the point at which you would say "If I
were to do this it may ameliorate the worst difficulties of the
exchange rate" to use your words ". . . but it would
put the inflation target at risk". That would mean that you
were imperilling what I have said clearly I believe to be an important
objective, that of achieving the target.
75. The MPC has other objectives now, to aid
Government's policies, particularly in relation to growth and
employment. I did not hear you complaining that you cannot carry
out those objectives as well as hit the inflation target.
(Ms Barker) No, but in the remit they are expressed
as clearly subsidiary objectives. The first priority is to hit
the target. It is right when you are looking at deviations from
the target and you are thinking about how to get back to it, to
ensure that you do not do so in such a way that you are going
to create a lot of disturbances and put the achievements of the
longer term growth targets at risk. That is the way in which I
would understand that second part of the target.
76. Would you have any objection to an objective
to ameliorate the worst effects on our economy of an over valued
or an under valued currency if it was a subsidiary objective to
hitting an inflation target?
(Ms Barker) I think I would have the technical difficulty
that it would be extremely difficult to achieve if you were to
imply by that you would then have to manage the exchange rate
in some way. I would point out that it seems to me already to
be adequately covered by the wording we have because, after all,
the problems that arise because of an over valued or under valued
exchange rate are precisely that it creates problems for output
and employment. Apart, of course, from the impact it has on inflation
because what is happening to the exchange rate is taken into account
in inflation forecasts. I am not sure what I think your form of
wording would add to the present way in which the MPC target is
77. Let me try to come at it from a different
direction. Do you yourself have any sympathy with those parts
of our economy that are hit the worst by an over valued currency?
You mentioned in your questionnaire manufacturing, agriculture
and tourism, for example.
(Ms Barker) Yes, of course, it would be strange not
to have sympathy with people who were under difficulties.
78. Would you like to take action as a member
of the Monetary Policy Committee to do something to help them?
(Ms Barker) Yes, I would, and the action I would like
to take is to deliver the Government's inflation target and price
stability because I believe that in the long run that will be
in the best interests of all those sectors. Clearly I recognise
they have difficulties and it would be extremely odd to say I
was not sympathetic to those difficulties and have notwearing
my CBI hat very brieflyput forward policies in the micro
fiscal area to try and address those. As a member of the Monetary
Policy Committee I think their interests are best served by the
achievement of the inflation target.
79. On those occasions where the two decisions
seem quite reasonable, and we have just had the debate in April
as to whether it should have been a quarter of a per cent or half
a per cent, where they are close decisions do you feel that those
sectors have perhaps not been given the weight they should have
been given in the total consideration of the committee in the
past and you are coming through to make sure that they do have
their fair consideration?
(Ms Barker) No, I do not think I would feel that.
Certainly there have been many members of the committee who have
very thoroughly done the job of going around to talk and understand
what is going on. I do not believe that people differ because
they have different views about how sympathetic they feel towards
sectors. Differences on the committee tend to arise because they
take different views of what is going on in the economy and take
different views, for example, of how bad the US situation will
be and what the impact is here, what is going on in terms of domestic
spending, how far will consumers be spending rather than saving.
It is those differences that tend to divide the committee, not
a view that we should be, as it were, nicer to one sector or region.