Examination of Witnesses (Questions 160-172)|
TUESDAY 27 NOVEMBER 2001
160. How much do you feel the pound is over-valued
against the euro?
(Sir Edward George) Trying to make that calculation
is an extremely imprecise kind of science. The only guide I have
is the sort of numbers that manufacturers who are trying to compete
in Europe give me, and that can go down towe are around
3.15 in Deutschemark terms now2.80, 2.70.
161. So you think that 2.80, 2.70 against the
mark would be a fairer valuation?
(Sir Edward George) I honestly do not give you a considered
judgment, it is what people say to me.
162. Presumably within the Bank, in order to
make a sensible judgment about the risk of decline in the exchange
rate setting off inflation, the Bank economists must have had
some look at how much they feel the pound is over-valued against
the euro in order to get a judgment of how much the pound could
(Sir Edward George) It depends on the circumstances
in which it occurs, and it depends whether the depreciation is
against the euro alone or against currencies in general. No, there
is not a "take off the shelf, here is the answer" kind
163. Could I tempt Mr King to be a bit more
(Mr King) I am afraid you will not, for the simple
reason we really do not know. The evidence I would use to come
to the conclusion that the exchange rate is not sustainable against
the euro indefinitely is what has happened to profitability in
manufacturing, which has been very substantially eroded over the
past three years. Although the growth of world trade has helped
to maintain export volumes, and manufacturing output has continued
overall to grow until the last 12 months, the concern now is that
profitability has been hit by the higher exchange rates, and this
has been taken on at margins which have eroded the profitability,
and now world trade has also slowed down. That is the problem
facing manufacturing and why it is very difficult to believe this
current exchange rate is sustainable, because of the evidence
of what has happened to profitability. That, unfortunately, does
not tell me what would a sustainable exchange rate be, and I simply
do not know that.
164. My last question is to seek clarification
on the answer which Kali Mountford had earlier on about the prospects
for unemployment. I notice in the minutes of the committee meeting
on 7 and 8 November, you do say there, Governor, or the paper
says, "Overall there are some signs therefore that labour
market conditions had at least plateau-ed and were perhaps easing
slightly." Do I draw the conclusion from that, that your
comments to Kali Mountford earlier were that the Bank thinks the
best outlook or most likely outlook for unemployment over the
next few months is for it to move gently upwards?
(Sir Edward George) Yes.
165. Governor, if it became clear from political
sources around the Treasury or wherever that Britain was planning
to hold a referendum on joining the single currency and that would
be at a lower level than the current rate, do you expect that
this would in fact impact market sentiments significantly and
that would in itself tend to lower the exchange rate?
(Sir Edward George) It is absolutely clear that every
time the speculation builds up this is imminent, then you do see
a weakening of the exchange rate. It does not persist very long
because it is not confirmed, so it is quite possible that if we
said, "Yes, we are going to go in tomorrow", you would
actually see the thing sell off, because nobody I know thinks
that going in at the current rate against the euro would make
any kind of sense; there are all sorts of questions about how
you decide and negotiate and all that, but leaving that on one
side. That is just a comment, an observation. The interesting
thing for us is what the implications of that would be. As I say,
if it drove the effective exchange rate down very sharply, that
would have implications for the inflation target, so we would
respond by having to tighten monetary policy. So you would get
the kind of discrepancy effected in another form in effect.
166. Should the referendum campaign come to
pass, all members of the MPC and in particular you, Governor,
are likely to come under constant pressure from the media to make
statements on whether you think a yes or a no would be beneficial
to the economy. I am sure you would be very careful in how you
respond to that. Do you feel there is a danger that because your
specific role in determining interest rates would change as a
result of us joining the single currency, this might influence
your judgment a bit, that you are all a bit reluctant to give
up the specific role you might have?
(Sir Edward George) I very much hope not. We are public
servants and that is our role. We all feel that very strongly.
So if that were the political judgment we should do this, that
would be what we would do, and we would do that to the best of
Dr Palmer: Thank you.
167. If none of my colleagues have any further
questions, I will sweep up with two areas. One is the issue of
productivity. In your November inflation report you mentioned
one result of 11 September would tend to lower the level of aggregate
productivity. I was at a seminar in Downing Street a couple of
weeks ago and one distinguished economist said the productivity
gap between the UK and the USA was 41 per cent, between the UK
and France was 11 per cent, between the UK and Germany was 7 per
cent. Lo and behold a couple of minutes later another very distinguished
economist said, "Don't believe them. The productivity figures
are not worth their weight at all." Given this range of eminent
economists in front of us this morning, what is your view on the
(Sir Edward George) Whether they are worth anything?
(Sir Edward George) I think international comparisons
are extremely difficult. Monitoring changes in productivity probably
is more meaningful but I think others will have a better view
of that than me.
(Ms Barker) I have spent a lot of time looking at
international comparisons and it is certainly true there is a
very wide range of uncertainty. The ones you quoted sounded to
me like output per person, and when you do output per hour you
get a relatively more favourable comparator with the US and a
less favourable comparator with France and Germany. The figures
all seem to indicate there is some gap between the UK and key
competitors but I think to be very precise about the size is foolish.
169. So you would not put your life on the productivity
figures and their reliability?
(Ms Barker) I would be prepared to stake that I think
there is a productivity gap between the UK and France, Germany
and the US, but I certainly would not stake very much, not even
as much as a fiver, on whether it was 20 per cent or 30 per cent.
170. Would any members of the committee stake
(Dr Wadhwani) Speaking personally, I even have trouble
using these numbers with any great confidence in monitoring developments
over time. I still find the UK productivity numbers through the
1990s, especially the 1994-98 period, quite puzzling, because
the official numbers suggest virtually no productivity growth
in manufacturing, yet all the anecdotal evidence and the CBI's
own numbers of what happened to manufacturing productivity were
quite different. Certainly the observation that inflation came
in somewhat lower than expected for much of the latter half of
that decade I think would be consistent with the productivity
growth having been faster than we measured it.
171. On the issue of public finance projections,
referring to the MPC minutes of March this year and also your
evidence, Governor, to our predecessor Committee, the Treasury
produces forecasts based on deliberately cautious assumptions
of receipts and expenditure, which you use as the MPC. After the
last Budget, some on the MPC questioned the appropriateness of
using these forecasts, and I have referred to your March document.
What issues arise for the MPC's forecasting process from the adoption
of the Treasury's fiscal forecasts, given they are based on deliberately
cautious assumptions? Secondly, what difference would it make
if the Treasury's forecasts were based on central rather than
(Sir Edward George) Mervyn, I will pass that to you.
(Mr King) The two key inputs to our forecast from
the public finance area are the stated plans for spending, public
expenditure, and the effective tax rates which are implied by
the Treasury's forecasts, so we do not use the Treasury's cautious
growth numbers to project revenues, we use our own. So in terms
of trying to think about the consequences for the outlook for
output and inflation, the key numbers we use are, if you like,
the structural numbers underlying the Treasury's projections for
both taxes and spending, and they are not in any sense biased.
So I do not think we are affected by the cautious approach which
is put into the fiscal projections by the Treasury. I think they
would say what they want to do is to try to make sure when they
produce a central projection for revenues to judge against their
fiscal goals. They want to say, "We have built in a margin
so we should be fairly confident", and they do some sensitivity
analysis in their published documents to enable you to see how
robust their conclusions are. I do not think that is directly
relevant to the way we make use of the numbers for the purposes
of our projections.
(Dr Wadhwani) Could I enter one qualification. My
memory of March is a little hazy but from what little I can remember
the issue on the table was whether or not we should go along with
the Treasury's cautious assumption there would not be any under-spending
even though there had been under-spending in the recent past,
and that could clearly have some impact on our growth and inflation
projections. I think that is what the debate was about.
(Mr King) The committee has at various points suggested
and discussed explicitly in the forecasts and the inflation report
whether it wanted to make a judgment that, relative to the stated
plans, we would expect expenditure to be either greater or less
than the figure actually put in there. By and large, we have been
perfectly content to take the stated public spending plans.
172. Do any of my colleagues have any final
questions? Governor, do you or your colleagues have any final
questions? This morning we expected doves and hawks to fly in
here, and there are none at all, the hawks have flown before you
came, so that was a surprise to us. Thank you for your time this
morning and we look forward to continuing the sessions.
(Sir Edward George) Thank you very much
indeed, Chairman. You said, did I have any more questions, I had
not realised we were allowed to ask questions! We will remember
that next time!
Chairman: Thank you.