MR MERVYN KING, MS RACHEL LOMAX, MR CHARLES BEAN, PROFESSOR TIM BESLEY AND PROFESSOR DAVID BLANCHFLOWER

29 NOVEMBER 2007

  Q60  Jim Cousins: How successful do you think monetary policy will be in containing the impact of costs and prices on the economy over the next year or 18 months?

  Professor Blanchflower: Again, I am not an astrologer. I do not know and we will wait and see.

  Q61  Jim Cousins: It is not a matter of astrology; we have just been told it is a matter of numbers.

  Professor Blanchflower: If you ask me what it will be going forward it depends on how the shocks come and how circumstances evolve. We are waiting and looking; we will have to see.

  Q62  Jim Cousins: Governor, in your discussions with us this morning you have been talking at a very high level of the economy, for example what the big banks do and so forth, but, as we know and as you have reported, at the supermarket checkout, the garage forecourt and the train station people expect price rises. Do you think monetary policy will be able to contain those price rises?

  Mr King: In the medium term, yes. As Professor Besley said, over any short period—eighteen months is a short period in terms of monetary policy—there can be no guarantee, but it is very striking to go back three years. If one supposed that oil prices would rise from $30 to $40 to almost $100 a barrel, with associated rises in gas and electricity prices, and one asked what impact that would have on the overall inflation rate, one would have been surprised to learn that inflation would stay within 1% of the target except for only one month. I believe that the regime of monetary policy has had some impact on it, in that clearly we cannot affect what happens to oil or energy prices but by monetary policy we can affect the climate in which firms set other prices. There is some evidence to the effect that when prices change relative to others firms believe we are prepared to take action to keep inflation close to the target in the medium run and it is risky for them to try to sell at higher prices than their competitors if the consequences of so doing are that inflation moves significantly away from the target.

  Q63  Jim Cousins: You are talking about the world we have known, not the world we face now. Particularly in the light of the comments we have just heard about uncertainties by the non-executives on the MPC, do you not believe there is some real risk that the committee will not be effective and will lose control of the situation and not contain costs and prices?

  Mr King: There is certainly a risk that we will make judgments which with the benefit of hindsight will appear to be the wrong ones. We cannot forecast at all easily what will happen in future and in those circumstances it is particularly easy to make mistakes. Unfortunately, it is not easy to know in which direction we will make mistakes; otherwise, we could set monetary policy more easily. There is certainly a risk, particularly given the elevated level of inflation expectations to which you refer, that it will not be easy to keep inflation close to the target in the wake of further increases in oil, energy and commodity prices. That is one of the risks that the committee firmly has in mind to counter the risks we have also talked a lot about today, namely the downside risks to activity which, other things being equal, will help to pull down inflation looking, say, two years ahead. We have to balance these risks. You are quite right; there is no doubt there are risks of inflation on the upside. We are trying to balance the risks from inflation expectations and all the things you mention against the downside risks to inflation which will come if activity slows sharply.

  Chairman: Governor, these are very uncertain times. We are grateful to you and your colleagues for giving us your individual views in such an open way. We look forward to seeing you again in December.