Examination of Witnesses (Questions 60-79)|
TUESDAY 27 NOVEMBER 2001
60. You have actually entirely stolen my next
(Mr King) I do apologise!
61. If you look at that table, Table 6.A, which
is where I am going, 2003, quarter four, two years ahead, and
you look at the risk that inflation would be below 2.5 per cent
and add up all those bits and compare them to the risks that inflation
will be above 2.5, you have a 49 per cent chance that it will
be 2.5 or less and a 51 per cent chance that it will be 2.5 or
more. Between friends, that means evenly balanced, but that is
not quite the impression that was given in the inflation report
and to some extent by your statement when there was a discussion
that there had been an upside risk to inflation. Would you agree
with your latest statement that it is actually more evenly balanced?
(Mr King) At the press conference, I was asked the
same question that you put to the Governor and, in response, I
went straight to Table 6.A and said that when we say that the
risk to inflation is slightly on the upside, that statement only
makes sense by reference to the central projection. Since the
central projection is slightly below the target, when you have
a small risk on the upside of that, you end up with, as you said,
an even balance to inflation and I think that Table 6.A explains
precisely why the level of interest rates were set at 4 per cent.
62. Before we leave that table, the Chairman
has already asked about the discussions that we had with our advisers
the other day when they expressed surprise that there seemed to
be a perception in the Bank that the inflation risk was towards
the upside when they considered them more to the downside. They
were also staggered by the GDP growth forecast for 2003 quarter
four, which seems to suggest that there is a one in 100 chance
for a recession occurring. Governor, would you agree with Table
6.A and the projections about GDP growth in which it is suggested
that the chances of growth declined in spite of the economy contracting
over the next two years are one in 100 or whatever?
(Sir Edward George) I honestly would not put any weight
at all on precise numbers. We are really trying to count angels
on a pinhead or whatever you do.
63. It is a very small number.
(Sir Edward George) These are absolutely tiny kind
of differences. I do not honestly, in these terms, think that
I understand the difference between a low chance of recession,
which is certainly our view, and quantifying that in this precise
64. Governor, these are the forecasts that you
and your economists within the Bank are making which must form,
to a large extent, the decisions about interest rates that you
are taking, and the forecast that you are making internally is
that a recession growth and the economy declining over the next
two years is a one in 100 possibility.
(Sir Edward George) It is a very small chance.
65. And that is your view, that it is a very
(Sir Edward George) Absolutely.
(Mr King) Can we just get this technically absolutely
right. What this number refers to is the probability that, in
the fourth quarter of 2003, the growth rate over the previous
12 months would be negative. It does not refer to the probability
that, at some point in the next two years, growth, even on a 12
month basis, will be negative, but I think there are two very
important caveats within these numbers. The first is that the
word "recession" is used by different people to mean
quite different things and much of the comment in the press has
been either about a recession being two consecutive negative quarters
of growth or indeed, at the world level, that the annual growth
rate of world GDP is less than 2.5 per cent, which is a very odd
definition of a recession. I do not like the word because it has
no precise quantitative meaning. In this context, the numbers
are referring to the probability that growth over any 12 month
period will be negative.
66. I accept that, Mr King.
(Mr King) In the tails of the distribution here, I
do not think that we have any good feel. Once the number is small,
it is very hard to be precise.
67. Using the Bank's own figures, what is the
Bank estimating is the probability of two quarters of negative
(Mr King) We do not have any means of doing that because
we do not project
68. You yourself have said that the risk of
recession is about one in 10.
(Mr King) At the press conference, I was referring
to, if you had to put a number on it, using the methods in the
charts which I warned at the time were imprecise because of the
tails of the distribution not being well-estimated, the chance
that the 12 month growth rate would be negative was about one
in 10 and I would much rather go back to what I said first at
the press conference which is that I think we do believe that
it is less than we felt was the case at the time in autumn 1998.
In November 1998 when, if you remember, there was great concern
about what might happen to the world economy, business optimism
had fallen very sharply and, at that point, we said that we felt
the chances of recession in the 12 month growth rate sense was
about one in four and now we believe it to be less than that.
As the Governor said, I think that to try and put numbers on it
is extraordinarily difficult because you can see from the charts
further up on page 56 that it is very unlikely that you can estimate
well the tails of the distribution because we have very few observations.
69. I accept that. Governor, do you think it
is nonetheless surprising, given the statements you have made
today and these probabilities, however loosely interpreted, that
you brought interest rates down to the lowest levels for 40-50
years and you brought them down pretty quickly and responsively
and yet the view of the Bank and yourself and the Deputy Governor
appears to be that the risks of a recession in the UK are actually
pretty low. Is that your view?
(Sir Edward George) You are talking about recession
which we very much hope we will avoid. What we are talking about
is unnecessary slowdown. We are not in the business of, "it
would be fine if we just avoid recession". What we are doing
70. But you regard there as being a very small
probability that we will have a recession?
(Sir Edward George) We do but what we are doing is
targeting inflation over the whole of the two year period and
we do not want to see growth any lower than it needs to be in
order to deliver that objective.
71. May I ask a final question on recession.
I think we all accept that it would be immensely surprising if
all of you on the MPC agreedthat would worry government
that you were exercising too tough control over your colleagues.
May I just, in discussing the forecast for inflation and growth
and in particular Table 6.A ask Mr Wadhwani what his comments
are about those questions and whether he considers that the GDP
growth projections and inflation projections and the low risk
that they appear to put on (a) recession and (b) a slowdown in
inflation to be credible and how Dr Wadhwani's view would differ.
(Dr Wadhwani) As has been said several times today,
it is reasonable for people to disagree about what are necessarily
uncertain issues. Speaking personally, I do have as my central
projection a lower outlook for both the GDP growth and for inflation.
In terms of inflation, my central projection is for inflation
to be about 0.50 per cent lower than the projection published
here and I also think that the risks are on the downside rather
than on the upside
72. For inflation?
(Dr Wadhwani) Yes, to inflation and to GDP growth.
In terms of why I think the risks are to the downside relative
to here, I guess that I am much more concerned about the global
economy. We have the three largest economies almost certainly
in recession as we speak. I am quite a bit more nervous about
the consensus projection of the V-shape recovery occurring some
time soon especially in the US where I think we have for some
time had a race against time where essentially you hope that you
can keep the consumer resilient while the corporate sector works
off its excesses. The difficulty is that the excesses are still
there in the corporate sector, you have an investment overhang.
The inventory correction has not ended but there are clear signs
now that consumer confidence is slipping and lay-offs are accelerated,
so I think that the risks have risen.
73. Is it credible with the risk, even looking
at it is loosely, that has been given by the economists at the
Bank in that Table 6.A about growth and recession, that the Bank
appears to be putting such a tiny probability on there being a
(Dr Wadhwani) That projection reflects the collective
wisdom of the Committee as a whole and I have enormous respect
for my colleagues. I think it is reasonable that people disagree
over these issues.
74. How much higher would you put the possibility
of a recession in the UK over the next two years?
(Dr Wadhwani) I am not sure that I would want to quantify
it precisely but it would be quite a bit higher than the numbers
here but it would still be a less than 50 per cent chance.
(Sir Edward George) Chairman, can I just point out,
as I am puzzled by the reference to the kind of outside forecasts,
that, if you compare Table 16 with Table 6.A, you will find there
is very little difference and the 1 per cent number that is being
talked about is 3 per cent in the other forecasters' expectation
on the range of forecasts, so I repeat the point that I make earlier
that we are really talking about really tiny differences.
75. I just want to continue briefly with Dr
Wadhwani. You have now been voting for interest rate reductions
at 13 consecutive meetings of the MPC. On eight occasions you
wanted a 25 basis point reduction and, on five occasions, a 50
basis point reduction. On only three of the 13 occasions has the
Committee done what you argued it should do. Are you sure that
you do not feel too lonely?
(Dr Wadhwani) I think the important point to make
is that we have all been going in the same direction. Month to
month, our judgments have differed somewhat perhaps because our
views about the eventual destination have obviously differed somewhat.
Economic forecasting is such a imprecise science and, when one
votes, one votes on the basis of one's own convictions about what
is likely, one recognises that these things are very uncertain
and I have enormous respect for my colleagues and, as the Governor
said right at the beginning, it is healthy that we disagree about
these issues because you have to make such difficult judgments
and it would be completely astonishing if we agreed all the time.
76. Have you ever considered on any one of those
occasions that the appropriate reduction in base rate might need
to be more than 50, perhaps 75?
(Dr Wadhwani) Yes.
77. When was that?
(Dr Wadhwani) At the last meeting, I actively considered
the possibility of 75 because I thought that the medium term fundamentals
justified that. However, I did not go for that primarily because
even the 50 cut that we actually enacted was somewhat of a surprise
and, in this situation, psychology is just as important as economics
and I think it was very important not to scare the horses and
go for 75 because I think that could have led to some concern
78. Can we take it from what you said that you
personally feel that interest rates at the moment are too high?
(Dr Wadhwani) I think one has to be careful because
I never pre-announce my views for the next meeting for the good
reason that I sit down, listen to the briefings that we get and
only decide which way I am going to vote on the day of the meeting
having evaluated all the evidence over the month because you essentially
have to take all the evidence over the month and add that to whatever
your pre-existing position is and sometimes the evidence overwhelms
whatever your pre-existing position was. Hence, I think it would
be premature for me to essentially make a judgment at this point
because I have not fully evaluated the news that we have had since
the last meeting.
79. Ms Barker, having picked the brains of Dr
Wadhwani at some length, I would like to get to know your thinking
a little better. Earlier, Sir Edward talked about the centre of
gravity of the Committee. As a relatively new member of the Committee,
how do you think you affect the centre of gravity now?
(Ms Barker) If you look at my debating record on the
Committee, you will observe that I have always voted in the majority.
You asked Sushil if he felt lonely on the Committeeand
the discussion is always rather complicated and you obviously
have to take a clear decision at the end and that is quite rightand
certainly I hope he does not feel lonely because many of us share
the concerns which he rightly raises and are very pleased to discuss
them. I think that like Sushil and indeed other members of the
Committee, I would not want to be classified as a hawk or a dove
because you always want to approach every meeting by looking at
the evidence and I think that to suggest that you are a hawk or
a dove suggests that you have some odd view about the inflation
target itself, either that you are trying to over-achieve it in
one direction if you are a hawk or that, if you are a dove, that
you do not care about it very much and I do not think that is
true for anybody on the Committee. So, I do not think it is right
to say that I affect the centre of gravity on the Committee; what
I hope I do on the Committee is bring the benefits of particular
experiences I have had particularly working with the business
community, comments about how I think the present conjecture will
be affecting business and interpretation of business surveys and
that kind of thing.