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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 767
HOUSE OF COMMONS
TAKEN BEFORE THE
Bank of England November 2012 Inflation Report
Tuesday 27 November 2012
Sir Mervyn King, Paul Fisher, Dr Martin Weale and Dr Ben Broadbent
Evidence heard in Public Questions 1 - 97
USE OF THE TRANSCRIPT
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Taken before the Treasury Committee
on Tuesday 27 November 2012
Mr Andrew Tyrie (Chair)
Mr Andy Love
Mr Pat McFadden
Mr George Mudie
Mr Brooks Newmark
Mr David Ruffley
Examination of Witnesses
Witnesses: Sir Mervyn King, Governor of the Bank of England, Paul Fisher, Executive Director, Markets, Bank of England, Dr Martin Weale CBE, External Member of the Monetary Policy Committee, and Dr Ben Broadbent, External Member of the Monetary Policy Committee, gave evidence.
Q1 Chair: Good morning, Governor.
Sir Mervyn King: Good morning, Chairman.
Chair: It is not very long since we last met, although in another capacity when you were before the Banking Commission.
Sir Mervyn King: Indeed.
Chair: I said, "You have about seven or eight months to go". As I recall, you replied, "Seven months and eight days".
Sir Mervyn King: Exactly, and today it is seven months and three days, because that was merely five days ago.
Q2 Chair: We note that. Of course, there has been a development-
Sir Mervyn King: There has.
Chair: -in your part of the economic bailiwick in the last 24 hours, and it is a very important event-not only for the British economy, it is also an important event for Parliament-because we are, as you know, going to be playing a role in the scrutiny of that appointment, as the Chancellor announced on the Floor of the House yesterday. Before we get into the hearing on the inflation report, I wondered whether you had anything you wanted to say about that appointment.
Sir Mervyn King: I think anyone who holds down a job like mine wants very much on the day when they leave to hand the Bank on to someone whom they know will carry on the good work. I am completely confident that with Mark Carney you have someone with whom the Bank is in very good hands, as indeed is the role of Governor, which I am sure he will carry out with very great distinction. I think the only other thing I would say is that the United Kingdom should take pride not only in the fact that we are willing to search the world for the best candidate, as the Chancellor said yesterday, but also the fact that we have produced a very strong shortlist. I think more than any other country in recent years, we had a truly outstanding shortlist from which the Chancellor could select, and he selected an outstanding candidate.
Q3 Chair: One of the important aspects of having a Governor with the self-confidence to speak their mind, as certainly you have done before this Committee, is that it can bolster the credibility of policy, and particularly monetary policy. You had a big hand in the creation of the inflation report, which is what we are discussing today. It is with that scrutiny and transparency role in mind that we will be holding that pre-appointment session with your successor.
Could I turn to the inflation report, and take you to page 40, where there are these charts that show your view about both the degree of uncertainty in the forecast and also your view of the likely prospects? What I note from this chart-and I think you noted it too in response to a question from Stephanie Flanders-is that the most likely outcomes have shifted to the left, that is have become more pessimistic, and that the main reason for this is that you think the chances of a rapid recovery have more or less been taken off the table. They have diminished sharply compared to your view three months ago. Why is this, Governor?
Sir Mervyn King: Let me first say that I am grateful to you for drawing attention to the inflation report. This is the 80th such report in 24 years, and I think it has served its purpose very well. I am also grateful to you for focusing on these charts rather than on the central projection, because I think the essence of policy making is looking at the balance of risks, and as you say, we have significantly lowered, in our view, the chances of growth being rapid. This is something that I think has been building up in our minds over the past year. It is not a sudden change between August and November. Although we only made the change in these charts in November, I think it was a result of finally realising that, as we had debated among ourselves the prospects for growth and the chances of a very rapid expansion of growth-which you might have expected if this had been a normal cyclical downturn and then recovery-we do not think that the chances of very rapid growth in 2013 and 2014 are very great. So we made what we thought was a realistic change to our judgment about where the balance of risks lies.
Q4 Chair: But my question to you is, what has changed over the last three months that has resulted in such a sharp shift? If you had been thinking about this earlier, much earlier, it should presumably have already started to appear.
Sir Mervyn King: Yes, and I think we should have done it earlier and we did not. I think there are times when you debate something and then you finally decide, "Look, our judgment really has to change now" and we wanted to make clear that we did not think that the balance of risks was appropriately reflected in previous inflation reports and we felt that this was a much more accurate reflection of where the committee was coming out.
Q5 Chair: Governor, in your answer to Stephanie Flanders, one of the reasons you gave was persistence of a weakness in the world environment or economy. Is that part of this?
Sir Mervyn King: Yes. I think the underlying economic factors that have led us to make this judgment through the year-and it has built up over that period-have been external factors. We have seen two things. One is obviously continuing problems in the euro area. We have also seen a slowdown in the world economy as a whole, particularly in the emerging markets, and our colleagues in the United States are still very nervous about the prospects there. I think the consequences of that, particularly weakness in the euro area, certainly have fed through to higher funding costs for banks, which temporarily we have managed to offset with the Funding for Lending scheme. The underlying problem is one in which there is still a great deal of adjustment to be made in the financial sector and in the economy as a whole, with the need for rebalancing. In this sort of situation, it is very unlikely that we would expect to see a rapid recovery.
Q6 Chair: What you are really saying is that it was a mistake to have published charts with such an optimistic upside in previous quarters.
Sir Mervyn King: Yes. Looking back, I think we wish we had not done that in earlier inflation reports, but as I say, this is partly something where you think about a problem, you debate it, and there comes a point when you say, "We are now pretty convinced that it doesn’t make sense to give so much weight to it".
Q7 Chair: So this was a tipping point in your decision-making?
Sir Mervyn King: Yes. I think so, yes.
Q8 Chair: Can I just ask you a bit more about your view of the prospects for the world economy? If I look at what you say in the inflation report, it only to some extent supports the view that you gave to Stephanie Flanders. It does not fully support that view. For example, you say there that quarterly GDP growth in China is estimated to have picked up since the beginning of this year, and you also point to signs of improvement in recent indicators in the United States. I think it is difficult to argue that although things are not better, things have become suddenly dramatically worse in the eurozone. So I am still a little at a loss to see exactly where this decline in the world economic environment is coming from.
Sir Mervyn King: Through the year, I do think that the concerns in the euro area have grown, because the underlying problems have not changed at all, but the longer the problem goes on, the bigger the adjustment that will ultimately be needed. The scale of the debts that are building up is growing and at some point that will have to be dealt with. I am less optimistic about the position in the emerging markets as a whole. The report points to a number of the latest statistics, and I think my colleagues in the United States are also concerned about how easy it will be to sustain a recovery in the United States. We will see, but I think the main point here was not about talking so much about the balance of risks around the central projection, or close to the central projection, on the downside. It was about saying was that it would take a rather unusual combination of circumstances to see growth at 4% and above in 2013 and 2014. Therefore, we felt that we had probably inadvertently given too much weight to growth in that range of 4%-plus in our previous report.
Q9 Chair: But the main explanation here is that over the last quarter, you have not become much more pessimistic. You were already quite pessimistic, but you hadn’t reflected it in your previous inflation report.
Sir Mervyn King: Yes, and I think our central projection-though I do not like to give too much emphasis to that-apart from the short term, has not changed very much.
Q10 Chair: You are also narrowing the fantail; you are also narrowing the range of possible outcomes?
Sir Mervyn King: Not possible outcomes, outcomes within the sort of 90% range.
Chair: On a probability curve, yes.
Sir Mervyn King: Yes.
Q11 Chair: That is also significant. You are saying not only that things are a bit worse, but that they are more likely to be worse-
Sir Mervyn King: No. We deliberately did not say that the chances of big downside events were bigger. We did not say that. We said that the chances of really strong positive outcomes were lower.
Chair: Yes, that is clear from chart 5.2.
Q12 John Thurso: Morning, Governor.
Sir Mervyn King: Good morning.
John Thurso: Can I turn to the question of bank governance and in particular pick up some of the things that Mr Winters told us? One of the things he said was, and I am quoting, "There appears to be some tendency within the Bank for staff to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable". Is that something you recognise and does it concern you?
Sir Mervyn King: I do not recognise it, to be honest. I think that he also made very clear that there is no stifling of dissent in the Bank. Indeed, he went out of his way to praise what he called the intellectual challenge which had been encouraged within the Bank, and I think that he was very clear that there was a great deal of discussion and debate. I think if you look at the people who come before this Committee and other parliamentary Committees, from the Monetary Policy Committee, from the Financial Policy Committee or from the Bank executive, there is no shortage of people who will put their hand up and say, "I don’t agree. This is my view".
Q13 John Thurso: I think the particular point he was making was that whereas at a senior level there was exactly that debate-and he did make exactly those comments, praising that-he said that there was a tendency among people at the lower level to prejudge which views might be more palatable for discussion further up, not in any negative way, but in a way of filtering. His suggestion was that if you removed the filter, you would get a more widespread selection of views that would then be debated at the higher level. That was, as I understood it, the point that he was trying to make.
Sir Mervyn King: Let me respond to that. He made three practical suggestions for what a Governor should do. One is what he would do if he were Governor. One is go around and talk to junior staff about what they thought; secondly, to have 360° appraisal, and thirdly, to introduce something pretty vague that he called modern management practices. When I became Governor, all three of those I introduced, so I have for 10 years been going around regularly and talking to small groups of junior staff and saying, "Tell me about your work. Tell me what you think". On the monetary policy side, we have a long-established tradition in which the heads of division all send to the Monetary Policy Committee their views as to what the MPC should be doing at the next meeting. So we positively elicit views, and the heads of division talk to all their junior staff to form a view in their division as to what they think should happen. We have 360° appraisal, and the executive team at the Bank was a new creation of mine when I became Governor. So I do not think I recognise those concerns.
I think what is the case is that once we have had a widespread debate in the Bank and discussed the ideas, there has to be a judgment as to what is the broad decision. That inevitably has to come either from the policy committees or from the senior executive of the Bank. The junior staff are asked to produce a draft of recommendations, but at that point they know what the broad decision is. But why don’t we ask Paul, because-
Q14 John Thurso: I was going to, absolutely. Can I just ask you this before I move to the others? The central thrust of what Winters was saying in his report-and it is backed up by stuff that other people have said-is that of necessity and over time, the Bank is a broadly hierarchical construct. It has been described as a constitutional monarchy, which makes you indeed the king, but-
Sir Mervyn King: Can I say, if this group of four people are a constitutional monarchy, then that is a very odd definition of what a constitutional monarchy is.
Q15 John Thurso: Are you rejecting out of hand the central thrust of what the Winters report said, which is that there is that hierarchical construct and that that could be improved?
Sir Mervyn King: The central thrust of what Bill Winters said was about the need to think more deeply about the way in which liquidity insurance is provided. That is the most important point. The Financial Policy Committee has already had one long discussion of that and will have several more before it finalises its reaction to the report.
In terms of the management, I would simply say this: that this is an organisation that has always encouraged debate and thrust of ideas, and you see at the level where decisions are taken, which is primarily now on the Monetary Policy Committee, the Financial Policy Committee and very shortly the PRA board-not the executive, the PRA board-that they will take the decisions on regulation and that there is a real culture of individual accountability and willingness to speak up. If you look at the senior members of the Bank who have come through in the past 20 years, the Andrew Haldanes, the Spencer Dales, the Paul Fishers, the Chris Salmons, the others, these are all people whom I promoted and brought through in the ranks of the Bank, and every one of them is willing to stand up in public, not just in private, and say, "I disagree with the Governor". That is a culture that we have tried to foster, because from 1997 onwards, it has been behind the success of the Monetary Policy Committee-the willingness to show that we are sufficiently self-confident to have an open debate. I think that gives both you on this Committee and certainly the business community around the country real reassurance that ideas that they think ought to be listened to are being debated and given a hearing. I think that is the most important thing, and that open, intellectual culture is a real one.
Q16 John Thurso: Paul, let me then come to you. Do you recognise any of the points that Bill Winters was making?
Paul Fisher: First of all, I think we have to take all the recommendations Bill makes very seriously. He has obviously heard this message from talking to some staff and I think we have to respect it, if that is the view that they have given to him. Since the report was published, I have been back through the recommendations I have put up to the Governors, and I am comfortable that we have not failed to put up recommendations that would be unpalatable. Of course we discuss what is likely to get accepted or not, but we frequently put up things that mean you might be unpopular because we think it was the right thing to do. Sometimes they are accepted, sometimes other decisions are made. I think what we have to address is why the staff have this perception. That could be because they do not see the whole of the process. It is a relatively ad hoc process, where we put up recommendations to the Governors, we have a meeting, we discuss what to do and that comes back down again. One of the ways forward in this might be to have a bit more formality about an operations committee deciding some of these things, whereby we can share minutes with more of the staff. They can see the whole of the discussion. You may have a lot of ideas, but you cannot keep reinventing the wheel, you cannot keep reassessing a decision that has already been made. So when you are putting recommendations up, you have to take account of what decisions you have already had, where you have reached, where your direction of travel is. That would not stop us reopening something if we wanted to, but you need to have good arguments if you are going to reopen a decision that has already been taken.
Q17 John Thurso: Perhaps I can ask Ben to talk some more. Do you see any of this, and is this something you are aware of, either the views that Winters was putting forward or the contrary view that the Governor put forward?
Dr Broadbent: It is difficult to prove a negative, in a sense. As Paul says, this is a view that has been expressed. I do not see much evidence for it. In both the inflation report meetings and the pre-MPC meetings, there are relatively junior staff who are asked to give their opinions. There is, prior to the inflation report, a forecast challenge meeting in which staff are explicitly invited to give contrary views. As the Governor said, heads of division are also asked to express the views of staff about MPC decisions. Indeed, there were sort of shadow meetings in the staff and I have been asked to go to two or three. Certainly if I have written a speech or I am doing any other work, I have never felt there was any problem in my contacting junior staff or them contacting me.
Q18 Chair: I will just quickly check, this looks like it is a degree of unanimity, but-
Dr Weale: I think so. I would like to say that I have heard staff say at meetings-and relatively junior staff-that they disagree with the MPC’s view, that the MPC view is different from the staff view. I think, as Paul said, one needs to think about why the Winters report has reported what it has, but it is certainly not the perception that I have. I have felt I have very good access to junior staff and they tell me what they think.
Q19 John Thurso: The last question, if I may, is to you, Governor. Clearly there is a view that what was in the Winters report on this is not accurate, if I can put it like that, or that he has picked up on a problem that is not as severe. What would be your short recommendation to either your successor or the court to ensure that this kind of thing is flushed out and dealt with-in other words, the point that he seemed to be picking up-one way or the other?
Sir Mervyn King: I think we will have to work very hard to make sure that junior staff feel that they are reassured that they can express their views openly. As I say, I do not think we feel they do feel such hesitation. I think that Bill Winters may have-
Q20 John Thurso: Just one clarification: my reading of what he said was not that he was saying they felt they could not express the view, but that they felt that it would be a good thing to pre-select some of the views that they put forward. In other words, it was not entirely a negative thing; it was that the junior staff wanted to remain within the central lines of the way the Bank was thinking.
Sir Mervyn King: Let me give you one example where I genuinely do not think that is true. It goes back to what the Chairman said earlier. I think the staff probably take a more upbeat view on the prospects for the Chinese economy than I would be inclined to, and we have had quite an active to and fro-ing about why I believe what I do and why they believe what they do. It has been a productive exchange of views, and I have never seen them remotely shy about saying, "Look, hang on. Why do you think that? These are the data, look at this".
I think there is one recommendation that Bill Winters made that I would certainly strongly endorse, which is that when there are meetings of the three Governors to decide on issues relating to matters that are not the purview of the three major policy committees, then formal minutes be kept of any dissenting view among that group of three-soon to be four- people. I would strongly endorse that. I think that would be a good idea.
Q21 Mr Newmark: My first question is for Paul Fisher. In the June meeting, you decided that additional asset purchases of £25 billion over two months were the right policy action. You found yourself in the minority position. How would you explain yourself?
Paul Fisher: My vote for £25 billion was very much one of timing. We had at that point two months to go before the August inflation report. I thought £25 billion was the right amount to do in that interval, with the expectation that come August, we would want to do more. So if you like, £25 billion was a down-payment on the full amount I expected to do, and over the time interval we had, I thought £25 billion was the right amount. So that was my personal view. Others, when they spoke about it, I think placed less weight on the time period over which it would have done. I don’t know what period they had in mind.
Q22 Mr Newmark: I am going to ask them in a minute, but do you think your views were reflected in the minutes properly or not?
Paul Fisher: I think so. I did go back over the minutes, and with all minutes, of course you could always have much longer and an opportunity to make it clearer. So I think I made it very clear in the meeting that it was the timing matter for me and I expected more to be done in due course.
Q23 Mr Newmark: Drs Broadbent and Weale, how did your views differ from Paul’s and why?
Dr Broadbent: I think the main reason at the time was I thought the economy was doing okay, and I put more weight in that respect on survey indicators of output and also the employment growth. At that time, I did not think-looking forward to inflation further ahead-that any further monetary easing was warranted. That would be the main difference.
Dr Weale: No, I hadn’t supported further easing then, because I was concerned about underlying inflation, that quite possibly it wouldn’t fall away as rapidly as the Bank’s central forecast had suggested.
Mr Newmark: So you thought inflation would fall away more or not fall away?
Dr Weale: No, that it would not fall away as rapidly as the central forecast had suggested. Of course that is not a reason for thinking that you never need to provide extra support to the economy, but I think generally I have been on the slightly pessimistic side about the inflation outlook.
Q24 Mr Newmark: Turning to the Governor, the minutes of the MPC note that, "While views differed over the exact impact of the MPC’s asset purchases, the Committee agreed that demand and output would have been significantly weaker in their absence." I am just curious first of all to hear your view on that, and maybe hear from the others as to how their views might have differed.
Sir Mervyn King: I think everyone on the committee has taken the view that without asset purchases, the increase in the money supply, the level of demand and then output would have been a good deal weaker. We tried to make some stab at calibrating this in our published article last year. I do not attach a great deal of confidence to our ability to quantify it at this stage, because we are operating in territory that we have not observed very often in the past. I would look at this simply through what has happened to the figures for broad money. In the absence of what we have done, I would have expected a contraction in broad money, and that would have taken us into very serious territory. I think that contractions of a significant size in the broad money stock are what led to the great depression in the United States in the 1930s, what has led to the equivalent in Greece today and would have threatened us-and indeed other countries-had we not expanded our balance sheet in the way that we did. I think other central banks have taken the same view, because the balance sheets of central banks have broadly expanded by roughly the same amount and using very similar types of instruments.
Q25 Mr Newmark: Just before I get to other views, I would agree with you on the first part. Mr Chairman. I have an MG TD and I know that when I do a cold start in the morning, I have to pull out the choke and sort of flood the engine with petrol and it gets it going. If I keep the choke out, there is a marginal impact in terms of getting my car going. Maybe that is not a great analogy, but I would just be curious, do you think the latter rounds of QE have been as effective as the first?
Sir Mervyn King: What I would say is that it is a proposition that is not to do with asset purchases as such, but is to do with any aspect of monetary policy that we might engage in. The purpose of monetary policy in part is to persuade people to spend today what they might otherwise have spent tomorrow. You bring spending from the future to today. The longer time goes on, tomorrow turns into today, and by now has become yesterday. This means that you have a hole to fill that you have created, which you had hoped you wouldn’t need to fill because by now the economy would have picked up, and it hasn’t. I think it is not asset purchases as such that are less effective. We are still injecting more broad money into the economy. It is about the ability to persuade people to spend more today when they know that in the long run-which cannot be deferred indefinitely-they will have to adjust to a new equilibrium.
Q26 Mr Newmark: But I am curious-when you are benchmarking the impact of that, what are you really looking at? When I think of QE in the extreme, if you keep effectively printing money, at some stage-and maybe it is a bit like a VLCC tanker-you create inflation further down the road. Is that not a concern of yours, if you keep printing money?
Sir Mervyn King: What we are doing is expanding what is called base money reserves at the central bank by a tremendous amount, a huge expansion of our central bank reserves. In more normal times, you might expect that that expansion of reserves would feed through to an expansion of broad money, and hence to demand spending and then ultimately inflation. That is not happening at present. If we saw any sign of it happening, that would be the moment to make a sharp change to the size of central bank reserves that we have created. Now, we have the tools to do that. We certainly have the tools to do that. It could be asset sales or could be raising bank rates. I am not worried about the lack of tools. What will be a real problem-and I do not underestimate the significance of this-is that the judgment about how much to raise bank rates or how much to engage in asset sales, and the knock-on effect of that on long-term interest rates, will be difficult to gauge in advance and will determine the outcome of policy. So I think there is a very difficult policy judgment to be made down the road-first as to when we start tightening monetary policy and then how rapidly we tighten monetary policy-but I do not think it is a debate about how we would do it. The very difficult judgment, which I am sure my successor will help the committee find a way through, will be a tough judgment, but it is not a decision about finding tools. The problem we have now is that we have used a large number of tools, and it is I think reaching the point where it is difficult for conventional monetary policy measures, including asset purchases, to bring forward spending from the future to the present.
Q27 Mr Newmark: No, I get that totally. I am just curious as to any of the others. Do you have maybe different views on the marginal impact of further QE and are any of you concerned about inflation being stoked up?
Dr Weale: Could I offer some thoughts on that? I said in a speech late last year that the bank’s central estimate of the effects of QE was at the upper limit of what I thought was plausible. I came to that view by thinking about what the effect of reductions in long-term interest rates-which I am confident QE delivers-would be likely to be on investment and on consumer spending. That said, I should say that if you were just to ask people what they thought the effect of a change in interest rates would be, there would be a divergence of views. I am very happy to sign up to the idea that asset purchases do support the economy and that they have been supporting demand, and that means supporting GDP in the slightly shorter term. Then in the slightly longer term, it does mean that inflation is a bit higher than it otherwise would be.
Do I think in the end the asset purchases will lead to inflation? What you have to remember is that the Monetary Policy Committee will always be pursuing an active policy in order to keep inflation close to its target, and that policy at some point in the future will involve selling off the holdings of assets. Of course, it is also likely to involve increases in the interest rate eventually. I would not like to say when, but eventually we will move back towards more normal levels. So the Monetary Policy Committee has the tools to keep inflation under control and of course its job is to go on using them.
Mr Newmark: Okay, anybody else?
Dr Broadbent: I think there is a slight misunderstanding sometimes about the link between money and inflation. For one thing, as the Governor points out, if there is a reliable relationship, it is broad money that matters, which for the private sector is all that matters. That is what we think of as money, and that hasn’t grown at all. Secondly, even just focusing on the narrow money on the Bank’s balance sheet, what matters is not the size of that per se, but how much central bank money there is and the supply of it relative to what people want to hold at a given level of nominal income growth. For the last few years, because of extremely high risk-aversion and unwillingness to hold any other asset-even sometimes liabilities of private sector banks-the demand for central bank cash is extremely high, and that is why we have not had much nominal income growth. Believe it or not, there is huge expansion, and it is not in excess of the demand for cash at the current level of nominal spending. As the Governor says, what will be difficult is judging the moment at which that demand starts to fall away, maybe because confidence starts to return, and it would be a difficult matter of judgment to judge when the size of the balance sheet as it is is too large.
Paul Fisher: I just wanted to add, you would expect the act of substituting central bank reserves for gilts into the markets to be dependent on the state of financial markets. So you would expect a differential response depending on conditions, but conditions remain stressed and those are the circumstances in which asset purchases are most likely to have an impact. But a lot of this discussion happens without any evidence. If you look at chart 1.7 of the inflation report, you see one of the indicators of the evidence, which is the extent of net sterling corporate bond issuance by non-financial companies in the UK. As you can see, in the two years in which we have done the most QE, 2009 and 2012, you have had record issuance of sterling corporate bonds. That is what you would expect, because as we take gilts out of the market, investors have to go and buy something else, and the demand for corporate bonds goes up. So you can see a very similar sort of impact in 2012 to what you had in 2009. Also, having been to the States, the evidence I have had there from market contacts is that QE, if anything, seems to be working more strongly now there than it did in the earlier phase through similar sorts of portfolio balance challenge.
Chair: We are going to have to move on.
Mr Newmark: I have one last quick question, if I can.
Chair: Be very quick, and a very quick reply.
Q28 Mr Newmark: This is a question one of my pensioners has asked me to ask you. My pensioners, and I think all of us here, have been saving up-
Chair: This is going to be a quick question?
Mr Newmark: Yes, let us get there. Their view of the impact of QE- which is to keep obviously interest rates incredibly low- is that having saved up their whole lives, they are effectively becoming dis-savers. Do you feel that the impact on pensioners has been a price worth paying for them with your current QE policy?
Sir Mervyn King: Don’t put words into my mouth. Our job is to try to meet the inflation target, and in order to do that, like all central banks around the world, we have lowered interest rates and made monetary conditions easier. That is the remit that you in Parliament get us to do and we have carried it out.
Chair: We just ask questions, as you know, Governor. We just ask questions.
Q29 Mr Love: Can I turn to the discussions around the decision about transferring the coupons held in the asset purchase facility? Did the Treasury initiate those discussions?
Sir Mervyn King: Yes.
Q30 Mr Love: When was that possibility of making the transfer first raised with you?
Sir Mervyn King: I would say some time in the first half of October, though I cannot today remember the precise date.
Q31 Mr Love: Did it not give you a little cause for concern about the timing of the approach from the Treasury?
Sir Mervyn King: The view that we took was that the money in the fund, the APF, does belong to the Treasury. They have indemnified the entire facility. The money there belongs to them. I think that if they had come to me and said, "Look, we would like some of this money back now" and I had said to them, "You can’t have it", this Committee would rightly have accused me of despotic behaviour in trying to prevent the Treasury from having access to its own funds. I think that would have been wrong. So no, I don’t think we should have been excessively concerned about it.
Q32 Mr Love: Did you raise with them why it was that they were coming to you at that particular junction, knowing that we were within a month of the autumn statement and knowing that there were issues about whether or not they would meet the fiscal rules? Did that occur in any of the discussions that you held?
Sir Mervyn King: What I did make very clear to the Treasury was that I thought it had no impact at all on the long-run fiscal position and that there was no benefit to the taxpayer from making this change, that what you might gain in one year on the published accounts you would lose on a subsequent year-and that view I made very clear. But it was their money, and it is not for me to say what they should do with their money or how they publish their accounts.
Q33 Mr Love: Can you just clear up the legal position in relation to this? Did you check whether legally you had any right to refuse, or was the position legally very clear that the Treasury could ask for this money without your-
Sir Mervyn King: The position was very clear. It is their money. They indemnify the entire fund. Any attempt by the Bank to have said, "You can’t have your money back" would rightly have been condemned by this Committee, or at least some members of it.
Q34 Mr Love: Let me ask you, did you take this decision alone or did you consult with other members of the MPC or other members of the bank? I know that you discussed it at the following MPC meeting, but was this decision already taken by that stage?
Sir Mervyn King: It is not a decision to take. It is their money, they are entitled to have it when they want, so from that point of view we had no decision to take. What we had to do was to decide how to react to it and to give advice to the Treasury on the consequences of it and how we would interpret the consequence of it. There were two meetings of the Monetary Policy Committee. We all understood the position about the fact that the money did belong to the Treasury and we thought deep and hard about what that meant in economic terms and how we would react to it.
Q35 Mr Love: Have you been surprised by the adverse comment that there has been, particularly in the press, in relation to that decision?
Sir Mervyn King: Not entirely. I think any move of this kind is likely to attract a good deal of cynical comment from our press.
Q36 Mr Love: Don’t you accept that it is more than cynical comment? I mean, there is real concern that this decision will give the Chancellor the option to, some would argue, manipulate the accounts to-
Sir Mervyn King: No, I don’t, because I think it is very clear-and I suspect and hope the OBR will say this-that this does not give anyone an option. It is merely taking cash in one year with a clear commitment to have to repay it in the next, and any impact it has on borrowing this year will be offset, other things being equal, by a higher borrowing need down the road. It does not have any impact on the long-term fiscal position.
Q37 Mr Love: I think everyone accepts that, but if the Chancellor chooses to use the coupon when assessing compliance with his fiscal targets, will that have any adverse effect on the standing of the Bank? Do you think that-
Sir Mervyn King: I do not think it will have any effect on the Bank of England. I think that it is exactly the sort of issue that you should be discussing with the Chancellor and the OBR, but not with the Bank of England.
Q38 Mr Love: This was indeed raised at the statement yesterday about the very welcome appointment of Mark Carney. The Chancellor’s response was that he had discussed this on several occasions with the Bank of England, so his defence of the decision is that this was agreed with the Bank of England.
Sir Mervyn King: Sorry, which decision are you talking about now?
Mr Love: The decision to transfer the funds.
Sir Mervyn King: I think we accepted that the money belonged to the Treasury and they were entitled to have the money back. The consequences of that in terms of the presentation of the public accounts and the concerns that you and others have raised-that it may be a method of misleading people about the public accounts-are entirely for the Treasury to face up to, not for the Bank. I listen very carefully to the advice I get at this Committee, and usually do not stray into fiscal policy territory. This is about the presentation of public accounts, and I do not want to dissuade you from looking into that and raising it with the Treasury, but the Treasury is entitled to have the money back, they are entitled to publish their accounts in the way that they want, and you are entitled to challenge them about whether those accounts are misleading or not. In no respect does that affect the ability of the Bank to carry out monetary policy, which is our job, or our standing in so doing.
Q39 Mr Love: One final question, and that is in relation to part of the criticism there has been-that you have taken a relatively narrow view of the remit of the Bank of England and the Monetary Policy Committee, and that while you obviously cannot stray into fiscal policy, the grey area between fiscal and monetary policy is somewhat narrowed in the current economic circumstances. Therefore, people would have expected you to exercise some judgment as to whether or not this was an appropriate thing in terms of the timing of the transfer, rather than any other issue.
Sir Mervyn King: It is their decision, and I think it would have been wrong for me to say yes or no. We have private discussions all the time about the merits of doing various things, and those discussions are private, but when it comes to a public statement about whether the Bank had the right to say no, the answer is very clear, and it does not in any way affect our ability to set monetary policy. That would have been a very serious problem if that had arisen, and I would have talked publicly about the consequences of any decision that would constrain the ability of the MPC to set monetary policy. But this was discussed among the committee-ask the others here today-and we all agreed that while it certainly affected monetary conditions, in the sense that it was broadly equivalent to a stream of asset purchases over the next year of £37 billion, we can take that into account and pursue whatever monetary policy we want in order to offset that. I think everyone understood that and was content with that, because our policy options were not constrained.
Mr Love: I would love to go on and discuss that with you, but I am afraid it is up to one of my colleagues to do so.
Sir Mervyn King: Come back later maybe.
Q40 Mr Ruffley: Sir Mervyn, you have been clear that you discussed with your fellow MPC members this decision to allow the transfer of coupon income net of borrowing cost to the Treasury because it was their money. That is basically what you are saying. When did you first discuss that with the Chancellor of the Exchequer?
Sir Mervyn King: As I said, it was the first half of October, but I can no longer remember the precise date.
Q41 Mr Ruffley: But you spoke to him-it wasn’t officials in the Bank speaking to officials in the Treasury.
Sir Mervyn King: There were communications at several levels, which often happens with issues like that.
Mr Ruffley: Which was it?
Sir Mervyn King: It was both. The Chancellor spoke to me and officials in the Treasury spoke to their counterparts in the Bank.
Q42 Mr Ruffley: Okay, so this idea that it would be prudent cash management from the Treasury’s point of view, the Chancellor raised it out of the blue at the beginning of October?
Sir Mervyn King: I cannot remember exactly when, but at some time around that point, yes, it was raised by them.
Q43 Mr Ruffley: But they had not mentioned it before October?
Sir Mervyn King: No.
Mr Ruffley: Not at all?
Sir Mervyn King: Not at all.
Q44 Mr Ruffley: All right. On 8 November, the MPC released a press notice stating that that day "the committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion". Did you approve that press release personally?
Sir Mervyn King: This is the November, the beginning of November?
Mr Ruffley: 8 November, on the day when there was the announcement that the 0.5% base rate and the £375 billion were not changing.
Sir Mervyn King: Yes. The press statement is approved by the Monetary Policy Committee as a whole. It was circulated to every member of the committee at the meeting and we all approved it.
Q45 Mr Ruffley: The words I have just read out are part of a whole press release on 8 November, which does not mention at all that MPC knew about, had discussed the £37 billion coupon income being moved to the Treasury, which obviously amounts to a monetary easing of £37 billion. Why did you decide to hide that?
Sir Mervyn King: We didn’t hide it. As we-
Mr Ruffley: You didn’t put it in the press release.
Sir Mervyn King: No, we did not, and as-
Mr Ruffley: Why not?
Sir Mervyn King: As with many examples of press releases on the day of decisions, the committee has access to information that is not in the public domain, that does not belong to the committee and that we have no right to put in the public domain. On that particular occasion, there were two pieces of information that were highly relevant to our decision. One was the transfer of coupons from Bank to Treasury and the other was the inflation number the next week, which we knew about, and in neither case would it have been appropriate to put that in the public domain. But this happens on a regular basis. The committee often has access to information that is not in the public domain and-
Mr Ruffley: Well, I know you-
Chair: Just let the Governor finish.
Mr Ruffley: Sorry.
Sir Mervyn King: The purpose of the minutes, published 13 days later, is that usually such information has gone into the public domain by then and the minutes provide a full explanation of the decision, explaining it in terms of the information that is in the public domain, including that which the committee had privy access to at the time it reached its decision.
Q46 Mr Ruffley: Why didn’t you decide to put it in the public domain on 8 November?
Sir Mervyn King: Because it wasn’t our decision to put it in the public domain.
Q47 Mr Ruffley: But it is monetary policy?
Sir Mervyn King: No, this is the Chancellor’s decision to transfer the coupon.
Q48 Mr Ruffley: No, no, no. You can look at it as cash management-it was the Treasury’s money-but it is monetary easing to the tune of £37 billion. How on earth can that be anything other than monetary policy, Governor?
Sir Mervyn King: It is broadly equivalent to asset purchases of that scale, and many things happen in the economy that are equivalent-
Q49 Mr Ruffley: But isn’t that a monetary easing?
Sir Mervyn King: It is not a decision taken by the central bank. It is broadly equivalent to asset purchases of a scale. It affects monetary conditions in the same way as many other changes.
Q50 Mr Ruffley: So you are saying it is not a monetary easing?
Sir Mervyn King: It is not a monetary easing decision of the central bank.
Q51 Mr Ruffley: But it is not monetary easing?
Sir Mervyn King: It is broadly equivalent to-
Mr Ruffley: So it is monetary easing? You need to be clear.
Sir Mervyn King: Don’t try and put words, Mr Ruffley-
Mr Ruffley: I am not. I am asking, is it monetary easing or not?
Sir Mervyn King: You define monetary easing first and then I will answer.
Mr Ruffley: I am asking you to say, is this monetary easing?
Sir Mervyn King: If you define what you mean by those words, I will answer your question.
Q52 Mr Ruffley: It is putting money back into the holders of gilts, isn’t it?
Sir Mervyn King: Yes.
Mr Ruffley: It is injecting £37 billion cash, in very simple terms, back into the economy.
Sir Mervyn King: There are many other things-
Mr Ruffley: That is my basic definition of monetary easing. Now, that is monetary easing from your point of view as well, isn’t it, Governor? Isn’t it?
Sir Mervyn King: It is certainly equivalent to asset purchases that inject money into the economy, as indeed are many other developments in the economy, including changes in exchange rates that alter monetary conditions, all of which are relevant to the policy stance of the MPC. But we are not entitled to put into the public domain information that does not belong to us but belongs to others. Others will have to decide when they put such issues into the public domain.
Mr Ruffley: Are you surprised that-
Sir Mervyn King: This happens on a regular basis, Mr Ruffley.
Q53 Mr Ruffley: I understand that. I just think there has been a huge amount of informed and professional comment about your omission in that 8 November press release.
Sir Mervyn King: The minutes that came out less than two weeks later made very clear-
Mr Ruffley: They do indeed, yes, but it seemed to be not very transparent. This omission has been commented on not just by members of this Committee but far and wide, as I am sure you are aware. Do you think it makes information released by the Bank of England more or less trustworthy?
Sir Mervyn King: Since we have been completely transparent about this since the day the Chancellor put this information into the public domain, and the minutes are very clear, I do not think it does affect the trustworthiness, but I cannot judge that. Others will have to judge that.
Q54 Mr Ruffley: Just one final question or two for you, Governor. The likelihood is that the asset purchase facility will be unwound when economic conditions are a bit better. You would agree with that, wouldn’t you?
Sir Mervyn King: Yes, but at what scale is impossible to say.
Q55 Mr Ruffley: Yes, forget about the quantum, because that would be a ridiculous question to ask, but by and large you might expect bond yields to be higher than they are now when the unwinding takes place. You would pretty much agree with that?
Sir Mervyn King: A third factor, namely the strength of the world and our own economy, would probably have led to bond yields at the long end being higher, and there is our wish to tighten monetary policy, yes.
Q56 Mr Ruffley: It has been argued that that being the case-and you have assented to those two propositions-that the Government might have to borrow more expensively at higher interest rates than at the moment, and that therefore that might not be prudent cash management. What do you say to that charge?
Sir Mervyn King: I think that all kinds of things can happen. You have made a perfectly reasonable speculation on what could be the case. None of us knows.
Q57 Mr Ruffley: No, it is not speculation, because I asked those previous two questions for a reason. The unwinding would by and large take place when the economy is in better shape, and all things being equal borrowing rates would be higher, so borrowing would be more expensive for the Government when you were doing the unwinding, if they had to borrow money to cover any losses to indemnify you. Isn’t that the case?
Sir Mervyn King: You have to take an average of the cost of borrowing at the long end versus what they are doing with this operation, which is to borrow at the short end, so how that averages out is almost impossible to say.
Mr Ruffley: Okay, thank you, Chairman.
Q58 Mr Mudie: You first heard of this, Governor, and first started these conversations with the Chancellor in early October. Did you alert the MPC in October to what was in the Chancellor’s mind, to give them time to consider?
Sir Mervyn King: Very shortly thereafter we had a conversation about what might happen. There was nothing definite at that stage, but the MPC were-
Q59 Mr Mudie: Who had the conversation?
Sir Mervyn King: I had a conversation with the MPC.
Q60 Mr Mudie: On the record, in a meeting?
Sir Mervyn King: Yes.
Q61 Mr Mudie: So you told them what was in the Chancellor’s mind?
Sir Mervyn King: I said it was a possible transaction that the Treasury might want to carry out, but they had not reached a decision on it.
Q62 Mr Mudie: When you firmed up these discussions with the Chancellor, did the Chancellor give you an indication-a specific indication-of what he was going to do with the £37 billion?
Sir Mervyn King: Yes. He made it clear that he was not going to use the money to raise Government spending or to borrow less than would otherwise have been the case.
Mr Mudie: In other words, he would enter the monetary policy field?
Sir Mervyn King: He would be carrying out an action that would be equivalent in broad terms to increasing asset purchases, yes.
Q63 Mr Mudie: But from the outside, on monetary policy you now look as independent as a Chelsea manager. The Chancellor has just wandered in, taken £37 billion, spent it in your field and you have just accepted it.
Sir Mervyn King: Few Chelsea managers have managed to last 10 years, Mr Mudie.
Q64 Mr Mudie: You are supposed to be independent. When a Chelsea manager takes a decision, they do not regard themselves as independent. I cannot see how you can regard yourself independent from monetary policy.
Sir Mervyn King: As was mentioned just now, very correctly-whether it was Mr Love or someone else, I have now forgotten-when interest rates are close to zero, the boundary between monetary and fiscal policy is extremely hard to define. What matters in terms of asset purchases is whether the total effect of asset purchases that the MPC wishes to achieve is or is not thwarted by actions taken by the Treasury, and the MPC discussed this at length and decided, without any doubt, that the MPC was not constrained in its setting of monetary policy.
Mr Mudie: No one is suggesting you are constrained.
Sir Mervyn King: We are not constrained.
Q65 Mr Mudie: You are now sharing, that is the point. You are not independent, you are sharing. The Chancellor has decided to enter your field, and you have admitted or volunteered in this Committee that you have no power to stop him, so you are not independent. Monetary policy is not a matter for you and the MPC now. The Chancellor has entered the field.
Sir Mervyn King: No, that is not right, Mr Mudie.
Mr Mudie: You have accepted it.
Sir Mervyn King: No, that is not right, Mr Mudie, because whatever the Chancellor does in terms of this one-off scheme that is written down and stated very clearly to Parliament and to the world, we can offset it. We can offset it to any extent we want. We can add to it or we can subtract from it.
Mr Mudie: No one is suggesting that, exactly.
Sir Mervyn King: In that case, how on earth can we no longer be described as independent?
Q66 Mr Mudie: No, exactly. No one is suggesting you do not have the facility to take whatever decisions you wish. The point is that this monetary policy area is the responsibility of the Bank of England and the Monetary Policy Committee, and the Chancellor has entered it, taken £37 billion that was pretty prudently placed for future recouping of the QE money and decided to spend it on monetary policy issues. So I am not suggesting for a second he has constrained your forces, if you wish. You can do what you wish, but he is in there with you now, because he has taken £37 billion and he has spent it on monetary policy issues. That is true, isn’t it?
Sir Mervyn King: I do not attach the significance to it that you do, because every month the MPC can offset any action that the Chancellor sets in this area, and we can achieve the monetary conditions we want. This particular form of transferring the coupons is hardly novel. It is exactly what the Americans and the Japanese have done. The reason why the money built up in the Bank was not a conscious effort. It really was accidental. No one bothered to sit down and ask about this at the beginning. No one really expected that the scale of asset purchases would reach this level or continue for so long, so no one really paid much attention to the question of the coupons for the first couple of years, because it wasn’t an important issue. I really do not think this constrains the MPC at all, but why don’t you ask others if they feel constrained?
Q67 Mr Mudie: I want to carry on in the same spirit as Brooks did earlier on about the Chancellor taking money and spending it now, and probably leaving a future Chancellor and a future economy to face up to a higher price. We have had this worry for some time. While supporting QE and saying, "No alternative to QE", you cannot be blind to the fact that there is a price to pay for this. It is odds on, as and when the economy recovers, that the price will be greater than where it is now. Did you specifically warn the Chancellor that it was no accident that this money was in the quantitative easing account, and that it would be necessary to have that? By taking it and raiding it now, entering into your field, he is not being very clever or very fair to your successor or to any successor of his as Chancellor.
Sir Mervyn King: Well, he has certainly raised-
Mr Mudie: Did you warn the Chancellor of that?
Sir Mervyn King: I certainly discussed with him the consequences-that taking the cash now from the bank to the Treasury would mean additional borrowing down the road, and of course the price that that borrowing would pay would depend on the maturity at which the debt was issued. The question that you raise about whether interest rates would be higher in the future, and therefore what is the optimal timing of debt management, is an important question, but it is very clearly one for the Treasury and not for the Bank. It is very clear that the previous Government took debt management away from the Bank, and I do not want to comment in public on an issue that is very clearly that for the Treasury and the DMO.
There is an important and crucial question that has received far too little attention: what is the right maturity structure of Government debt to issue? If you feel you are in a position where interest rates are unusually low for a period, that will affect the answer to that important question. I would encourage you to pursue it with the Treasury and the DMO. It is an important question, I accept that, but it is not a responsibility for the Bank. I do not think I should put myself in a position of saying publicly to the DMO and the Treasury what their policy should be. But I did make it clear to the Treasury, and I think they were well aware of it anyway, what the consequence of this action would be.
Q68 Chair: You said a moment ago that you felt that this sum had been building up almost by accident, as a by-product-you are nodding your head in agreement, Mr Fisher. While that was taking place, was there not a strong duty on the Bank all the time to press the Treasury to regularise the situation before we arrived at such a large sum of money?
Sir Mervyn King: It depends what you mean by "regularise". It did not seem to me- Chair: You said a moment ago that transferring the coupons is standard practice.
Sir Mervyn King: It is a perfectly reasonable thing to do, but I do not think-
Chair: That is regularisation, isn’t it? That is doing the normal thing. You wouldn’t say this is abnormal, would you, Governor?
Sir Mervyn King: No, I wouldn’t say it was abnormal, nor do I think there was any desperate need to do it. I mean, it was something that to my mind does not have very much economic significance. It does not constrain the MPC, it does not affect the underlying position of the public finances. If the Treasury wanted to do it, then it was their decision and they should be free to do it.
Q69 Chair: What is the answer to my question though? Why didn’t you go to the Treasury?
Sir Mervyn King: Because I do not think we felt it was of any significance. There are plenty of other things to worry about in the UK economy, but tidying up something that did not desperately need tidying up did not seem to be a priority.
Q70 Chair: Okay. There is another point that I am not quite clear on. Given that some might argue-you might feel perniciously-that the minutes that you published could be construed as somewhat misleading because this knowledge of this transfer was not in the public domain at the time-
Sir Mervyn King: Not the minutes, the press statement.
Chair: In the press statement. Why you did you not ask for the release of this information and the Treasury’s announcement to take place at a time co-ordinated with the press statement?
Sir Mervyn King: They knew when our meeting was taking place and when we would release our press statement. It was really up to them to decide whether they wanted to go before or after us, and they chose after.
Q71 Chair: So to the extent that the public arguably have been misled to some degree or have had an incomplete picture of monetary conditions for that period-
Sir Mervyn King: To the extent-
Chair: Let me finish as well, Governor, since I gave you the opportunity to finish. To that extent, would you argue that it is a responsibility of the Treasury to have closed that gap and they failed to do so?
Sir Mervyn King: I would argue that. I think it is unfortunate if people were misled, and I think that is a matter for regret, but I do not think it is a very significant point. There was other very important information that the committee had that we could never have released until the inflation data were published the next week. People knew that we see the inflation number, but they didn’t know what it was until next Tuesday. From that perspective, it is always the case that the committee is likely to have, or may have, information that the rest of the world does not have. What people can be assured of is that when the minutes are published, all will be revealed and the explanation made fully clear. I think that is why we attach so much weight to the minutes.
Chair: I think we are much closer to being in the same place-that there is something here that is a cause for regret. Whether it is a minor or major regret is another matter-
Sir Mervyn King: Indeed.
Chair: -but there is something that could have been better handled.
Sir Mervyn King: Indeed.
Q72 Mr McFadden: It seems curious, Governor, that £37 billion could build up by accident. I mean, even between friends, that is a fairly serious sum of money.
Sir Mervyn King: Let me rephrase it. The money did not build up by accident. It accumulated in the fund. The question of whether the fund was the right place to allow the money to accumulate or whether it should be transferred to the Treasury did not seem to me to be a matter of any great significance. If the Treasury had wanted to do something about it, they were always free to do it. For me, it did not seem a very important decision. It was true in the case of Japan and the US that the coupons were transferred. In our case, it was not. I do not think that affected anything of any fundamental importance at all. It affected neither fiscal policy nor monetary policy. It did not seem to be an issue that was worth raising.
Q73 Mr McFadden: Let me ask you a bit about the impact of it. Chris Giles, writing in the FT, said that following this decision, he no longer believes that "this government is serious about economic or fiscal policy. Nor does it appear the institutional checks and balances work to protect the public." He says the effect of this is that the Treasury is proposing expensive borrowing in the future instead of cheap borrowing now. I do not expect you to agree with his overall classification of the decision, but on this borrowing point, is it a fair point to say that the effect of this is to propose expensive borrowing in the future instead of cheap borrowing now?
Sir Mervyn King: That will depend on what the Government choose to do in debt management in the future. I cannot answer that. This is the point that Mr Mudie raised. It is an important point and it is a question you might take up with the Treasury, but it will depend on their strategy for debt management.
Q74 Mr McFadden: Let me ask the other members of the MPC. In the same article, he says that the MPC "appears to have acquiesced in an easing it had not initiated, after misleading the public that it had kept monetary policy unchanged when it took its monthly decision last Thursday. Allowing the Treasury to initiate monetary policy suggests the MPC has lost the plot".
Dr Broadbent: Can I answer? Chris, who is sitting here, and I had a conversation, and I have known him a long time and respect him a great deal, but on this point I think he is completely wrong. I went into that meeting if anything feeling that I was going to vote for more asset purchases.
Mr McFadden: You effectively did.
Dr Broadbent: Let me finish. The economy had turned down. The output indicators were pretty weak. In fact, we have never had output indicators and surveys suggesting that we can see the policy tightened. Most of the time, it has been eased. There were two things that gave me pause and or changed my opinion and made me vote not to increase asset purchases. One was, as you say, that we already had some monetary easing effectively through this coupon transfer, and I was always free to vote whatever I thought was appropriate on top of that. I do not think it compromised my ability to vote for what I believed to be the appropriate monetary conditions one iota.
Secondly, inflation was stronger than we had expected for reasons that were likely to persist into future years. For those two reasons, I decided not to vote for more asset purchases. The question is not so much whether this amounts to monetary easing or not, because it does. The question is who, as it were, is the last mover-who ultimately sets monetary conditions- and that is the MPC, regardless of this. So I simply do not agree that it called it into question the independence not just of the MPC but of individual MPC members. I just do not think that is true.
Q75 Mr McFadden: Dr Weale, what is your response? Tell us when you knew about this, and whether you and other MPC members fully realised the kind of fuss that this would cause in terms of the blurring of the boundaries between monetary and fiscal policy.
Dr Weale: The press have obviously made something out of it. I feel that probably they have made more out of it than is justified. From my perspective, the Government do a lot of things that influence prospects for economic growth and inflation. This was obviously one of the things that we took into account, like we take into account the other things that the Government do. But it is certainly not a mechanism through which the Chancellor is going to set himself up to try to undo the effects of the MPC. It is part of the background, and against that background, we set monetary policy to keep inflation close to its target so that we expect it to be at target or close to target in about two years. This decision by the Chancellor really does not affect my ability to make the decisions I think appropriate to keep inflation close to its target.
Q76 Mr McFadden: Given that you have all said the effect of this is equivalent to an easing of £37 billion, was there any discussion of that in the MPC? Governor, you said that you could offset this. Was there any discussion in the MPC of some unwinding of QE in order to compensate for a decision that added up in effect to another £37 billion of QE?
Dr Weale: Could I perhaps take that question, as one of the MPC members who is perhaps slightly more concerned about inflation than the median? This was one of the things that I took into account. As Ben said, the economy has looked rather weaker than we might have expected, and in the light of that, I thought some further support for the economy was justified. One obviously cannot tune it to precise numbers, but the effects of this transfer seemed to me to provide the support for the economy that I thought appropriate, all things considered. So I had absolutely no difficulty in voting for the decision that I made, and I did not think that it would be appropriate either to try to unpick the asset purchases that we had been carrying out or to suggest an increase in the bank rate.
Q77 Mr McFadden: I understand that logic, but doesn’t this make it all the more curious that there was no reference to it in the press release? The press release said, "Bank rate unchanged, quantum of QE unchanged". It is pretty fair for the public or commentators to respond to that by saying, "The Bank have not changed anything". But as we tease this out, what you are both saying is, "The reason we did not change the quantum of QE was because we were effectively increasing it by £37 billion because of these economic affairs". So there was quite a big impact to not mentioning it.
Dr Broadbent: As the Governor has made clear, we were in no position to publish information that did not belong to us and was not already public. It was published, as I remember it, the following morning, so the fact of that transfer-
Mr McFadden: That makes it all the more odd.
Dr Broadbent: Yes, but I am just saying we are aware of lots of things, as the Governor said, that are not in the public domain, and that will clearly affect our decision. Maybe it is unfortunate about the timing, but I do not think we were in any position at all to put that number into the press release. Then the minutes made everything plain a fortnight later.
Dr Weale: I must say, I agree with that position completely. I think that this decision was a Treasury decision and it would be very odd were the Bank of England or the MPC to publicise Treasury decisions.
Q78 Mr McFadden: Let me ask you one final question about this, Governor. The Institute for Fiscal Studies, in their pre-autumn statement report, said, and I quote, "Any assessment of whether the Chancellor is complying with his fiscal targets should be based on measures of the fiscal aggregate that do not take into account the impact of this change, and when assessing compliance with the fiscal targets, the Chancellor should instruct the OBR to act in the same way", i.e. not take this into account. Do you agree with that?
Sir Mervyn King: I would not dream of commenting on what the OBR should or should not do. That really is a matter between the OBR and the Government and it is a question you should put to the OBR in due course.
Q79 Mr Love: Can I just come back to this whole issue about publication of the decision? Surely it would have been within your remit to ensure in your discussions with the Treasury that you could publish all the information at exactly the same time. Was this never discussed, and why didn’t you insist that they should make this known publicly at the same time as the minutes were being published?
Sir Mervyn King: But we did not know when they were going to publish. We pointed out to them the consequences of this. They knew the reaction of the MPC. The judgment as to when it was sensible to publish, as Martin has said, has to rest with them. But I made our position and our view very clear and well known to them.
Q80 Andrea Leadsom: Good morning, Governor.
Sir Mervyn King: Good morning.
Andrea Leadsom: This is a very awkward session, it seems to me, because it is highlighting really that the MPC is operating in a complete silo. Don’t you think that this is rather akin to the situation where Tim Geithner of the US indicated to you he thought that LIBOR was being manipulated, and you simply reviewed it and then passed it on to the BBA because it wasn’t your problem? Are we not in the same situation again? You are saying, and I quote, "Our job is to meet the inflation target". Because, as far as you are concerned, this £37 billion is just cash management, you are allowing the Treasury to get involved directly in monetary policy. You are all complicit in that.
Sir Mervyn King: I do not accept any of that, not even a word. The comparison with LIBOR is, to me, completely irrelevant. We did not simply wash our hands of it. We did ensure that the BBA was trying to do its job, but the BBA had the responsibility. The only connection I can see is that it is absolutely clear in this instance that the Treasury have the responsibility for debt management and not the Bank. The idea that we should somehow push our way in public into those areas seems to me completely contrary to the entire spirit of this Committee, which has always said, "We will hold you accountable for those things for which you are responsible, but don’t stray into other areas of policy". I think we have behaved absolutely properly in this area and the committee is completely unified on it. So I am mystified as to why you think that.
Q81 Andrea Leadsom: I am not suggesting for a moment that you should go and have that discussion in the press, but are you really saying that you all concluded at the October meeting that £37 billion of further QE was exactly the number that you wanted to put into place? That is effectively what you are saying. By simply accepting that this coupon was going to be paid, you knew you were undertaking £37 billion further of quantitative easing, and somehow you have all drawn the conclusion that it was not a penny more or less than what you were targeting.
Mr Fisher, for example, you have talked about wanting to support a further £25 billion of QE, so why did you not say, "Well, why don’t we then unwind £12 billion to reach my £25 billion target"? Why was £37 billion just the perfect number?
Paul Fisher: That was back in June and we subsequently needed £50 billion, so that is past history. We have done much more since then. This did not affect my vote at all. It is a relatively small number spread out over a long time next year. The thing that weighed on me in our November meeting was the inflation data. I have been particularly concerned about some of the growing risks of price shocks, which do not come from domestic demand, as they would if it was QE that was underlying them. That was what held me back from voting for more. My disposition is still that I think we may well need some more easing next year, so I am perfectly happy if there is a bit out there in the system, and when we go into next year, we can perfectly well decide whether it is £37 billion, £50 billion, £25 billion or some other number.
Q82 Andrea Leadsom: Dr Broadbent and Dr Weale, at the October meeting, you went into there thinking, "I am going to vote for £37 billion of further QE"-exactly that number. Is that the correct analysis?
Dr Broadbent: No, I went into the meeting thinking on the Wednesday-although one can never make up one’s mind until one has had the meeting-that I would probably vote for more. We paint, frankly, with a pretty broad brush. We do not vote for asset purchases ever of £32 billion or £37 billion or £41 billion, it is £25 billion or £50 billion. So we would never have done precisely that amount.
Andrea Leadsom: Exactly.
Dr Broadbent: No, but that makes what we are talking about therefore a residual number. I don’t know, I might have voted for £25 billion, I might have voted for £50 billion, so £12 billion of QE is really hardly going to matter one way or the other, right? It just doesn’t. We do not think in terms of such small units because it is just not possible to be so accurate about it. I think I probably would have voted for more. This was one reason, but probably the more important reason was the inflation print, and I decided not to. But the idea that I should definitely have voted for £37 billion and that is the only way I can establish my independence and the primacy of the MPC in setting monetary policy is, it seems to me, nonsense.
Q83 Andrea Leadsom: But Dr Weale, how can that be nonsense? Clearly MPC members have voted for £25 billion or £50 billion, as Dr Broadbent says, so therefore if somebody comes up with a number and imposes it upon you of £37 billion, you absolutely have the right to say, "I prefer £25 billion or £50 billion" and therefore to either increase or reduce the amount, yet none of you chose to do that.
Dr Weale: I must say, I see the issue as very similar to the fact that we move the bank rate in quarter percentage points, not tenths of a percentage point. One might imagine in some circumstances that there would be some other change in Government policy or some other change in global circumstances, which if things could be precisely calibrated would lead one to say, "I think the bank rate ought to go up from"-one thinks of the days when this was normal-"5% to 5.1%". Now, I think if the MPC were to do that sort of thing, people would say it was giving a degree of precision to the sort of decisions that you cannot logically give a degree of precision to. Certainly I think had we been discussing the sort of asset purchases we have made, as you have observed, have been in bundles of £25 billion, £50 billion and so on, but that does not seem to me any reason for thinking, "Therefore I need to top this decision up to £50 billion or prune it down to £25 billion". We make broad decisions because these things are not capable of a precise analysis. Other things will happen to the economy over the next few months and in the light of those, the MPC will decide perhaps that policy needs to be looser or that it needs to be a bit tighter, and in doing that, it will take account of the fact that this number is £37 billion rather than £50 billion.
Q84 Andrea Leadsom: So did you consider at any stage putting a toe in the water? Did you consider, since your movements are normally £25 billion or £50 billion, what the impact might be if you were to say, "We decided as a group £25 billion was the appropriate amount so we are going to unwind £12 billion of QE just to test the market"? As you said yourself, Governor, we are in unknown territory when it comes to the unwind, and it is entirely feasible that interest rates will rise. It would be quite a good idea, would it not, to test the market to show that you do mean business and that the day for unwind will happen? Is that something you discussed at the MPC?
Sir Mervyn King: For the reasons that both Martin and Ben gave, we do not discuss it in that degree of fine-tuning. When the time comes to tighten policy and sell assets, I think that will be a really difficult moment, and it will be very important for the committee to prepare the markets for that decision in order to avoid a very large overreaction, which we saw in the 1990s in the case of the United States. They tried to raise interest rates from a low level after a long period of low interest rates, and there was a very big movement at the long end. That is why I said earlier that I think the challenge when we get to that point will not be so much the instruments we use as the judgment, the preparation and the communication, and that will be a very difficult moment.
Q85 Andrea Leadsom: You have made that very clear, but my question was so why did you not use this unique opportunity to test unwinding some QE? You normally move in £25 billion or £50 billion figures. It would have been perfectly logical for you to say, "We all prefer £25 billion and that is our normal number, so we are going to unwind £12 billion and see how the markets fare" because inevitably that would be constrained. It would have been an interesting toe in the water. Was it something you discussed?
Sir Mervyn King: No, and I think it would have been completely impossible to explain on the day itself, and a decision to switch from asset purchases to asset sales would have had a very big reaction and a big impact on the market. Since we were not in a position to explain why we would be sales at £12 billion, the market would not have known until the next day that this was a decision for expansion rather than a tightening of policy. It would have been impossible on that day to have done that.
Q86 Andrea Leadsom: So this goes back to my accusation of you working in a silo, because obviously since the Treasury made the announcement about what was going on the following day, had you could have had a conversation with them and said, "What we would really like to do is to use this opportunity to test asset unwinding, and this could be a unique opportunity, because nobody could misread what we are doing here". You could have had that conversation with the Treasury, but you chose not to.
Sir Mervyn King: No, I do not think that the committee would have been remotely in that position. I think Ben and Martin have explained about trying to say that the net effect is £11 billion or £12 billion. After all, the £37 billion, as Paul mentioned, is not equivalent to £37 billion of QE in a way that we would normally do it. We would normally-and have done so far-spell out a programme of asset purchases over a period of three months. This £37 billion was over a period of more than a year and that is different, in effect. I think fine-tuning here is not something to get into, and the risk of misleading communication would be enormous. I accept what the Chairman said, that it is matter of regret that these announcements were not made at the same time. We can differ in view as to whether it was a small regret. I think within a matter of hours, the Treasury made their announcement. I do not think it had any significance, and I share Ben’s view entirely about what this means in the long run both for fiscal policy and for the credibility of the MPC, but there is perhaps a small regret that we did not handle the announcements better.
Q87 Andrea Leadsom: A final question for Dr Weale and Dr Broadbent. Is it a matter of regret to you that there is such a lack of diversity on the MPC? Do you think that there is a risk of groupthink by virtue of the fact that you are all men and all from a mainly economics/theoretical background rather than market practitioners?
Dr Weale: Could I say first of all of course that the appointments, or the external appointments, are handled through the Civil Service.
Andrea Leadsom: Yes. I am asking you if it is a matter of regret, not whether it is your fault.
Dr Weale: What can I say? I am very happy with the colleagues that I have. I have not devoted my time to speculating whether there might be other people on some committee who would be even more fun to work with. I am very happy with the colleagues-
Q88 Andrea Leadsom: But I am asking you if there is the risk of groupthink due to the lack of diversity.
Dr Weale: Sorry, could I come on to your question about economists versus market practitioners?
Andrea Leadsom: And diversity.
Dr Weale: And diversity. I think that, no, we are a group that has diverse views. The Governor made this point, and I have certainly observed and contributed to wide-ranging discussions on the MPC where different people have different views. People have no trouble in voting against what they think the prevailing opinion might be. No, I have certainly never been worried that I would find myself in a minority on some occasions. Do I think that there is groupthink? I think the whole point of a committee is that you discuss. I think it would be absolutely extraordinary if I went to committee meetings with my ears blocked, refusing to listen to what my colleagues had to say. Indeed, that, as I say, is the point of a committee, rather than simply voting in disconnected way.
On the issue of economists rather than market practitioners, of course different members of the committee have had different types of experience and that adds to the intellectual diversity. I do think it is important that people have an economist’s training so that they can think through the mechanisms. I suppose my worry might be that people who did not have that sort of training may be perhaps over-influenced by what the market view is of the right thing to do at the moment, but as I say, I am very happy with the colleagues I have on the committee.
Q89 Andrea Leadsom: Dr Broadbent, do you think that Mr Carney is-
Chair: This will have to be a very quick question and a very quick reply.
Andrea Leadsom: Do you think that Mr Carney will be as happy to tolerate a complete lack of women on the MPC as the Governor has been?
Dr Broadbent: I have no idea. I will find out.
Chair: That sounds a short reply, and I am sure that he has to keep up with what is going on in the Premier League if he is to have chance of surviving the exchanges we have been having here.
Sir Mervyn King: He knows a great deal about it.
Chair: You clearly know a good deal about his qualifications for the job.
Sir Mervyn King: I do.
Chair: As you have already pointed out.
Q90 Mark Garnier: Dr Broadbent, can I turn to zombie companies? Spencer Dale noted that "the whole point of monetary policy loosening at the moment" was to "keep companies who have a viable long-term future in business while demand is temporarily weak", but we have had this monetary loosening now for four years. Do you think we are not at the point where we are just keeping a lot of dead companies alive pointlessly?
Dr Broadbent: It is difficult to say. We see aggregate data and we do not have much information on what is going on under the surface. What is striking is how few companies have gone bust. It may well be that while one wants to keep any company that has a long-term viable future in existence, others may have been kept in existence that do not have a long-term viable future, but that is very difficult for us to know categorically. It is certainly difficult for us to distinguish between one and the other, and it is the point of a market economy to decide who survives and who does not, frankly. But it is possible, yes.
Q91 Mark Garnier: Dr Weale, do you have anything to add to that?
Dr Weale: I can picture that there are companies going that otherwise would have had gone to the wall, but in broad terms-in terms of economic performance-we have of course puzzled over the issue of why the supply side of the economy seems weak. The zombie companies, by their nature, presumably aren’t those companies that are making a profit. You might think that the mere fact that successful companies are making profits would mean that those are the sorts of companies that are in a position to expand and move into new markets and to innovate. Now, I do not have a clear sense of the quantitative effect that people are attributing to zombie companies, but I would have thought in terms of an explanation of why the supply side has been weak, it could only be one part of an overall picture.
Q92 Mark Garnier: I appreciate that, but one of the frequent complaints that we get as Members of Parliament is that people with good ideas and new businesses are finding it incredibly difficult to get cheap credit, so the real credit out there is quite expensive if you want to go and get it. Yet we are now talking about zombie companies, and potentially huge numbers of them, that are, if you like, mopping up the supply of cheap credit in order to keep going. It is quite an important factor, and what we are trying to do is get a handle on what you think about this, but you do not seem to think-
Dr Weale: Could I say on that of course the Funding for Lending scheme has very positive incentive to banks to increase their lending.
Q93 Mark Garnier: Yes, but safe lending, and SME lending is very, very high risk lending. They are more likely to do it on mortgage money, aren’t they?
Dr Weale: I think that what you have said makes the point that what seems like a safe proposition to the innovator or the person running the business looks like a risky proposition to the person who is expected to put up the money. Of course, if someone runs a business that is on loan finance, they take the profits and the downside goes to the person who is doing the lending. I am certainly not saying that I can judge the rights or the wrongs of the picture, but I certainly take the view that it is a bit more complicated than the view you may simply get from an entrepreneur. I remember a lovely story in the Financial Times a few years ago-this was before the banking crisis really developed-of a couple in the Cotswolds who had a business and could not raise money from the Bank, and wasn’t this absolutely dreadful, and in the end they had to put their own money into it. No, I am not saying that is necessarily widespread, but one does wonder about the various incentives and incentive structures, and I can quite believe at the moment credit is very tight. What I find a bit harder to believe is that the banks are not only letting zombie companies that can just pay the interest on their debts keep going, but throwing good money after bad, tipping new money into zombie companies to keep them going. It is an issue that we are looking into and I would like to know more about.
Q94 Mark Garnier: So would we, which is why I am going to press you on that question. I completely take your point about a bank being asked to write a call option on a business, which is essentially what they are doing. They take all of the risk but none of the equity upside. But it still comes back to the fundamental point about how we kick-start the economy. I might go back to you, Dr Broadbent, because you are nodding. You have a number of dynamics. There is only a finite amount of cheap credit available, and if all or a lot of that cheap credit is being taken up by supporting zombie companies, then it is going to tighten up the supply elsewhere, which is where you need it-perhaps with more dynamic companies. There is also a deeper problem in this, as I see it, which is the stability of the banks. As long as these companies are servicing their debt-which they are, because the debt is very cheap and very cheap to run-they can get away with it. What we do not know is what the real shape of the balance sheet of these banks is, and I think it is incredibly important that we get to some sort of answer on this. Governor, you are nodding as well, and between the two of you who are nodding, I will be very interested to hear more about your thoughts about the risk to balance sheets, in terms of the lack of useful credit for new innovators and in terms of the tying up of cheap credit in companies that are not that productive.
Dr Broadbent: I will let the Governor discuss the banks, but I will just say, in stepping back a bit, that we have long been puzzled by very low rates of productivity growth. My own feeling for a while has been that there is a connection between that slow rate of productivity growth and the slow rate, or even failure, of rebalancing the economy towards the tradeable sector. That connection may lead to a difficulty in allocating credit and other forms of finance efficiently across the economy. The difficulty with all these things is having sufficient information to say definitively, "It is this or that". I think all of us agree that even if it were possible at the end of the day to explain precisely why productivity growth has been slower, it is unlikely to be due to any single explanation alone. There are probably several things going on, but I have believed for some time that there is a connection between the problems in the financial system and the slowness both of rebalancing and of productivity growth. The difficulty of judging the risks on banks’ balance sheets may well therefore be very important for productivity growth.
Sir Mervyn King: I do not like the phrase "zombie companies". You raise some very important issues, but the problem with the phrase "zombie companies" is that when we had downturns in the 1980s and 1990s, we were really worried that companies that did have a viable long-run future were being forced out of business because interest rates had gone up and they couldn’t get enough finance from the banks to tide them over their difficult circumstances. Now we seem to be worried about companies that ought to be forced out of business not being forced out of business because interest rates are too low.
Q95 Mark Garnier: If I may, it is about the timing, the issue of the four years.
Sir Mervyn King: So I think the question you raise is really about the adequacy of the supply of credit. Rather than looking at the companies, it is about what is happening to the supply of credit. I think there have indeed been difficulties, which is why we introduced the Funding for Lending scheme. I think that will make a difference and it will be visible in 2013.
Now, the real challenge, as you point out, is once the Funding for Lending scheme comes to an end. It has given us breathing space. We will then need to ensure that the balance sheets of the banks are in a good shape, but that is something for the Financial Policy Committee, and if you can be patient for just two more days, the latest financial stability report and the views of the Financial Policy Committee will be published on Thursday and they will be saying more about that then.
Q96 Mark Garnier: That is very helpful. In anticipation of that, one other thing that has been suggested as creating zombie companies-I will use the expression, if you will forgive me-is companies’ exposure to interest rate swaps. Given the fact that there is a huge liability for those companies, since interest rates are so low and they are obviously paying quite a lot for interest rate swap products, the banks are quite keen that those companies keep going, because of course the other side of the interest rate swap trade is the banks’ balance sheets. That in itself, it has been suggested to me, has a colossal effect-tens of billions of pounds’ worth-on banks’ balance sheets. I am just wondering if you have done any work on that, and if the FPC will be-
Sir Mervyn King: I am not going to comment on any of the numbers, because we are all in purdah as far as the FPC is concerned.
Mark Garnier: Sure.
Sir Mervyn King: But the point you raise, the general one, is one of forbearance. Now, forbearance has two dimensions. Good forbearance can take place when banks feel, "Look, this company does have a long-run future. Let’s not put it in a difficult position now". Bad forbearance is where the banks do not insist on repayment, not because they care about the customer but because they are worried about the implications for their own balance sheet, given the account conventions under which banks operate. That is undoubtedly a concern, because the issue is-and this is the fundamental question we will come back to on Thursday-to what extent are the balance sheets giving an accurate representation of the underlying position of the banks?
Mark Garnier: I won’t press you any more. Thank you very much.
Sir Mervyn King: Thank you.
Q97 Chair: Governor, I am sure that you will accept that our job, among other things, is to safeguard the independence of the Bank and particularly to safeguard the independence of the MPC, and whatever the reality, it is the appearance that your independence might in some way have been prejudiced, even to a small extent, which has been of concern to a number of us today with respect to the coupons and the decisions taken on them. I am sure you accept that, and therefore I am hoping I will get a response from you saying that you welcome the bolstering of your independence with scrutiny of this kind. Do you agree with what I have just said?
Sir Mervyn King: Yes, and I think we are very grateful to this Committee for supporting our independence. Your job is to hold us to account, you scrutinise what we do, you cross-question us quite openly-and often ferociously-but you have always been very strong in supporting our independence. I think what we have said today is that we do not think that in substance this operation compromised our independence, but it is very important that we go beyond that and ensure that not only is our independence not compromised, which I think is the case, but has not been seen to be compromised. That also matters, which is your point.
Chair: Which might have been the case and which is the cause of the source of regret.
Sir Mervyn King: Indeed.
Chair: Thank you very much for coming to give evidence today. It has been extremely valuable and interesting. We have had a prolonged discussion on one particular area, but I think it probably merited it.
Sir Mervyn King: Can I thank you? This is a memorable day for me. Not only do I know today that I have an outstanding successor, but this is my 100th appearance before a parliamentary Committee since I joined the Bank.
Chair: There was one point, Governor, when I was a bit concerned, because shortly after you told us that you had seven months and three days to go, I noticed you pull out your watch. I thought you were going to tell us many hours you had to go as well.
Sir Mervyn King: No, the watch does not quite give the precise time to the second. I had another means of knowing that.
Chair: Thank you very much for coming.
Sir Mervyn King: Thank you very much.