Examination of Witness (Questions 60 -
WEDNESDAY 22 MAY 2002
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
moreI would certainly like to hear moreabout fiscal
policy on consumer spending? We have seen consumer spending have
a huge impact on the economy lately. Surely you would have a view
(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
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 economyhousehold debt, a persistent current
account deficit, an accumulated external debtbut 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.
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
(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
Mr Cousins: Thank you.
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
Chairman: Do my colleagues have any final
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.
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
(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
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.