TUESDAY 25 MAY 1999

MR EDDIE GEORGE, MR MERVYN KING, PROFESSOR WILLEM BUITER, PROFESSOR CHARLES GOODHART AND SIR ALAN BUDD

  180. The difference in long-term rates is what we have been talking about. Your argument is that the difference in short-term rates is irrelevant to the point that my colleague has been making. Is that right?
  (Mr King) What matters is the average level of interest rates that people expect to persist in economies and in the long run that reflects both inflation differences, but also uncertainty about inflation—the risk premium that people need to be paid to be compensated just for the uncertainty about where inflation will go. That has fallen. Both expectations of inflation and the risk premium have fallen.

  181. May I ask you about this? The Chancellor said that this was going to contribute to a stronger and a fairer Britain, that this change in interest rate setting mechanisms was going to lead to a stronger and fairer Britain. Those are obviously the Chancellor's words. They are not the words which would flow naturally from members of the Monetary Policy Committee. What do you think the contribution has been to a fairer Britain?
  (Mr King) To give people some greater reassurance that policy would be set in such a way that the return to the boom and bust cycle would be less likely. No guarantee, but the policy would be set by a group of people who would not have a political temptation, not because we are better or superior in any sense, but just because we have been put in a position with one very clear remit and asked to carry that out. That method of taking decisions should give some reassurance about the stability with which the economy can be managed. You may think that does not in and of itself contribute to a fairer Britain, but what it does do is to give you and other people in parliament the chance to implement policies to make Britain a fairer place without being diverted by a financial crisis, which has so often been the case in the past.

  182. You said in a rather interesting lecture that your public job as members of the Monetary Policy Committee, "... is the task of providing a stable macroeconomic environment, thus enabling politicians to do what they were elected to do". Could you give us some clues?
  (Mr King) Yes. I have never met any MP who came to the Bank for a briefing who said their mission, when they decided to put up with the intolerable conditions which many of you put up with as MPs, was to go into politics to bring the inflation rate down. It is to do with all kinds of other things: education, health, defence, foreign policy, all the things you are supposed to do. In many cases, when people had finally got through the door of the Cabinet room, they were confronted in the past, during the last 30 years, with details of the latest macroeconomic crisis to hit the UK and throw off course all the plans for other policies which people have wanted to implement. It is not our job to implement any of those policies. All we can do is try to make a small contribution to reducing the frequency with which other policies were blown off course.

  183. Here is a funny thing. Today we have learned that Lloyds/TSB—here I ought to declare an interest, one of my little personal contributions to M4 is via the mechanism of Lloyds/TSB—post merger are now going to close 700 branches. British Airways have just announced a considerable reduction in profits which could affect short-haul airline services to my own part of Britain. Could you tell me? Are these two things matters for me as a politicians or are they matters for you?
  (Mr King) In some cases they are matters for neither of us because what individual firms do in individual business decisions is not something which is likely to be terribly profitable to try to influence. What really matters is the framework which together we both set, we in terms of setting monetary policy and you in setting legislation across a very much broader area of policy. You cannot judge the outcomes in terms of either stability or fairness in terms of decisions by one firm or a second firm.

  184. Putting it another way and to quote the inflation report, the corporate sector financial deficit had reached three per cent of GDP, its highest level since 1990, at the end of 1998. Is that a matter for me or is it a matter for you?
  (Mr King) It is a matter of concern for both of us. It is something we take into account in setting the level of interest rates. We have made substantial reductions in the level of interest rates and the impact of the corporate financial deficit on likely investment expenditure was one of them. I repeat that all we can do is to set one instrument, the short-term official interest rate, to try to bring about a more stable macroeconomic picture. We cannot influence total investment, we cannot determine total investment, although we can try to influence it through our policies, making it more stable. Certainly we have no influence over the plans of any one company, nor would that be a sensible thing for anyone, perhaps even you, to try to achieve. What we can do is set the framework within which, in our case the monetary framework, in your case the wider set of issues, unfolds. Let me make absolutely clear that there is no pretence on our part that we can abolish the business cycle. The business cycle is alive and well. There will be ups and there will be downs. All we can do is try to reduce the frequency and severity of some of those ups and downs.

  185. Do you agree with Professor Goodhart that in fact you have been rather lucky to avoid short-term inflation shocks so far?
  (Mr King) I certainly think that the environment in which we have been working is one that has made it easier to bring inflation down and keep it close to the target. That is certainly true. It has not however been uniformly easy in terms of making policy because there has, as the Governor has stressed, been this enormous difference between those parts of the economy exposed to international competition and those which are not. That has not made policy particularly easy in terms of setting it. There is no doubt that we have been blessed during that period with the absence of major inflationary shocks, yes.

  186. We are going on a trip today to Frankfurt. If you were able to give Wim Duisenberg some advice about how the monetary framework of the ECB could be improved, what would your advice be?
  (Professor Buiter) He already knows what my advice would be since I have written a rather longish paper on the subject, which I have sent to him.

  187. Which we have here. "Alice in Euroland".
  (Professor Buiter) That is correct.

  188. Give us a few key points you think we should be making.
  (Professor Buiter) It is really making some points from our experience operating as a Monetary Policy Committee about the significant benefits of openness, transparency and the importance of procedural transparency as well as the ability to judge performance against objectives which requires a clearly defined target, procedural accountability, procedural transparency. These are just general points. I am sure that he finds it very good bedtime reading.

  189. We can carry your message of one Dutchman to another one when we meet Mr Duisenberg tomorrow.
  (Professor Buiter) Very much so. I am sure he will be very grateful for it.

  190. His answer to that will be that that means that nations will start to posture as nations and that he cannot have that and it all has to be done behind closed doors that it can act as a corporate entity.
  (Professor Buiter) Nations always posture as nations. That is what God made them for.

  191. That is not what the Central Bank is about, it is about a federal state.
  (Professor Buiter) The question is whether the decision-making council of the Central Bank is less likely or more likely to give in to inappropriate national pressures when decisions are made in secret or when the votes and the main arguments are out in the open. I recognise the concern, I fully share the concern, that in the case of institutions where the supranational sense of community is still rather weak, the temptation of national governments, national lobbyists to try to influence "their" representatives on the council must be there, even though it is against the letter and the spirit of the Treaty. All we disagree on here is the most effective way of resisting such nationalist pressures. To me the best defence against undue pressure is openness and transparency.
  (Professor Goodhart) May I add that on certain details, not all the members of the Committee would necessarily share all of Professor Buiter's claims. You will find that the ECB believe that they are as transparent and as accountable as any other central bank, including the Bank of England. I am sure that is what they say. The point of interest, at any rate to me, is that the ECB believe that they need to present their decisions as collective and that they feel that the strength of monetary policy is weakened if they allow the nature of the internal disagreements to become public knowledge.

  192. In other words they are a different body in one sense from you because they are expressing their view as a collective, whereas you express your views as a collective but you are individuals arriving at a collective decision.
  (Professor Goodhart) We feel that if anything it is a strength to allow the inevitable minor disagreements about the course of a fine judgement of policy to become public knowledge, while they tend to feel that that would actually weaken the strength of policy.
  (Mr George) I would encourage you, as you are going over on the plane this afternoon, actually to read some of the statements and look at the Monthly Bulletin put out by the ECB. You will find that there are references to different possible interpretations in the Bulletin and what we are talking about is a question of form in relation to an organisation which is in a quite different situation. If you compare what the ECB does in terms of transparency, in exposing its analysis and in exposing the factors which give rise to its decisions, with what its predecessors did, then it is chalk and cheese. They have moved a very, very long way.

  193. What you are saying is that we should look carefully at their monthly reports. There is a lot in there which is somewhat similar to your inflation report and indeed even to your minutes. Is that right?
  (Mr George) Absolutely; absolutely.

  194. Another aspect of your openness has been, as we heard yesterday, the willingness of members of the MPC to go out and listen to views around the country. I know that the Governor was in Birmingham last week. What sort of reaction do you think you received in Birmingham?
  (Mr George) I enjoyed it. I do not think I learned anything new because of course we do get extremely well served by our agencies who report the mood to us directly. I got a reasonable hearing. Of course what those people who were really at the cutting edge of this imbalance wanted was help. That was very clear and I have every sympathy with that. I sought to explain to them the limits within which we could help.

  195. You have today recognised that imbalance as a problem in the economy.
  (Mr George) Not just from Birmingham but in general the impression I have in talking to groups—I was talking to the farming community yesterday, I was in Cardiff just before the weekend—who are really under the hammer is that they attribute their situation to things which are happening in this country. I actually think that they perhaps do not appreciate the extent to which their condition is dictated by what is happening in the world economy. That is true since demand in their markets has fallen off, that is true because of the competition coming from other countries, including the emerging markets, but it is also true because of the major impact of the weakness of the Eurozone and therefore the weakness of the euro. Very naturally, they tend to aim at what they can immediately hope to hit, and that is monetary policy here in the UK and the strength of the sterling exchange rate, as though that was directly a function of monetary policy.

  196. Do you think that the effect of the greater contact you have had with these groups outside the rather stuffy confines of the City, have actually led the MPC to be more activist as a whole, never mind individuals, over the course of its short history?
  (Mr George) Activist in what sense?

  197. Do you think you are now more willing to respond to some of those concerns that have come from a broader constituency than simply perhaps the City?
  (Mr George) No, I would honestly think not. We have always had the branch network before and we have expanded it so we are better informed. We are a great deal better informed now but we have always travelled around the country to try to get first-hand impressions as well as reported impressions. The situation has changed and in that sense, I would hope that we have been more responsive—it is more to do with the extent of the divergence between the different sectors of the economy rather than because of any change on our receptiveness to what is happening out there.

  198. You do not think you are any more receptive now than you were two years ago?
  (Mr George) No. We were sensitive to the situation across the country two years ago and we are now. The divergence between the different sectors has increased and therefore we are giving more emphasis to that problem of imbalance.

  199. Going back to the people who were really hurting when you went to Birmingham and the very detailed description you gave as to why they were hurting, we all have constituents who are at the sharp end, who do not understand in the detail you have just given, why they are at the sharp end. What more can the Bank do to explain the situation they find themselves in because the message is not getting through? They say interest rates, exchange rates, we are hurting. It is not getting through to grass-roots manufacturers and exporters as well as it ought.
  (Mr George) I honestly do not know what more we can do. We do now give an incredible number of speeches. Continuously we try to explain, the agents explain. The reaction very often is that they understand we have problems too, but actually that is not much help to them. Whether we can really get through? I do not think we can alter that situation. Until the economic situation does improve, as I believe it will, but maybe gradually, that is a very natural reaction. We can talk until we are blue in the face and a little bit of this is what I got in Birmingham—I am not complaining because it is very understandable—but you can talk until you are blue in the face, you can explain it as carefully and as clearly as you can, but you are still going to get people who are really facing difficulties, saying it does not help them much. That is what you are seeing.

  200. May I ask you one question while we have the "independents" here? What impact do you think having the independents, the outsiders on the MPC has had to the Bank's monetary policy? What did they bring?
  (Mr George) Expertise, insights, multi dimensions. We had a lot of that before of course but the Committee is absolutely just the right size, our debate, our analysis, involves much more cross-fertilization than we had before. They have been a great source of improving the enthusiasm of the staff to produce. They have been able to raise questions, more questions than we would. It is that kind of impact I would say.

  201. Does anybody have anything to add to that?
  (Mr King) It is now a professional process in a way that, with the best will in the world, the previous regimes could not be quite as much. We are the people taking the decision. It is a Committee of nine people, equal in importance in deciding what the outcome is, working together to try to struggle to find out the answer to the question of what is the right level of interest rates this month. We do it month in, month out and it is worlds away from where we were before. Although there are bound to be mistakes, and clearly we cannot control everything that happens in the economy, in so far as monetary policy can make a contribution to bring greater stability to the UK, this is a process and these decisions should in part be judged by the process and not just in terms of the outcome. This is as good as you can get and it is the external members, the kind of Committee we have, which was instrumental to that.

  (Mr George) I would just say that the type of appointment that is made to the Committee is absolutely fundamentally important. We have been singularly fortunate and we are singularly fortunate in Sir Alan Budd's successor too.

  Chairman: Thank you very much. May I say that we shall be publishing the report of the confirmation hearings at one o'clock.