HOUSE OF LORDS

Select Committee on Economic Affairs

1st Report of Session 2006–07

The Current State of Monetary Policy

Report with Evidence

Ordered to be printed 12 December and published 18 December 2006

Published by the Authority of the House of Lords

London : The Stationery Office Limited £price

HL Paper 14

The Economic Affairs Committee The Economic Affairs Committee is appointed by the House of Lords in each session with the orders of reference “to consider economic affairs”.

Current Membership The members of the Economic Affairs Committee are: Lord Kingsdown Lord Lamont of Lerwick Lord Lawson of Blaby Lord Layard Lord Macdonald of Tradeston Lord MacLaurin of Knebworth Lord Oakeshott of Seagrove Bay Lord Paul Lord Sheldon Lord Skidelsky Lord Turner of Ecchinswell Lord Vallance of Tummel Lord Wakeham (Chairman)

Information about the Committee The reports and evidence of the Committee are published by The Stationary Office by Order of the House. All publications of the Committee are available on the internet at: http://www.parliament.uk/parliamentary_committees/lords_economic_affairs.cfm Members’ interests are available at the Register of Interests: http://www.parliament.uk/about_lords/register_of_lords__interests.cfm

General Information General information about the House of Lords and its Committees, including guidance to witnesses, details of current inquiries and forthcoming meetings is on the internet at: http://www.parliament.uk/about_lords/about_lords.cfm

Contact Details All correspondence should be addressed to the Clerk of the Economic Affairs Committee. Committee Office, House of Lords, London SW1A 0PW The telephone number for general inquiries is 020 7219 4568 The Committee’s email address is [email protected] CONTENTS

Paragraph Page Introduction 1 5 The current state of inflation 4 5 Inflation and the labour market 6 6 Inflation and money growth 11 7 Figure 1: UK Inflation and Money Growth 1985–2006 7 Inflation and asset prices 14 8 Monetary and fiscal policy 20 9 External appointments to the MPC 27 10 Conclusions 31 11 Appendix 1: Economic Affairs Committee 12 Appendix 2: List of Witnesses 13 Appendix 3: Call for Evidence 14

Oral Evidence Mr Mervyn King, Governor of the Ms , Deputy Governor of the Bank of England Sir , Deputy Governor of the Bank of England Ms , External Member of the Monetary Policy Committee Professor , External Member of the Monetary Policy Committee Oral evidence, 31 October 2006 1

Written Evidence Professor Ray Barrell and Ms Rebecca Riley 12 Professor Jagjit Chadha 15 Professor Tim Congdon 16 Professor Charles Goodhart 28 Mr E J A Haygarth 29

NOTE: References in the text of the report are as follows: (Q) refers to a question in oral evidence (p) refers to a page of written evidence

The Current State of Monetary Policy

Introduction 1. This is the fourth report of the Select Committee for Economic Affairs on the work of the Monetary Policy Committee (MPC) of the Bank of England. The previous reports were published in 2003, 2004 and 20051, and before this the Select Committee on the Monetary Policy Committee of the Bank of England, the predecessor to this Committee, published reports on monetary policy in 1999 and 2001.2 2. This report covers the main features of monetary policy for the twelve month period since November 2005. It is based mainly on evidence given to the Committee by Mervyn King, Governor of The Bank of England, and four other members of the MPC in October 20063, on the Inflation Reports for 2006, and on the Minutes of the MPC. The Committee invited written evidence on the current state of monetary policy. The report also takes account of this. 3. Over the last twelve months the Bank’s repo rate was raised by 25 basis points on two occasions, in August and November 2006. At the end of the year it stands at 5%. The August increase was the first change in the official interest rate since August 2005, when it was cut by 25 basis points to 4.5%. On neither occasion was the MPC unanimous in its decisions. In November two members of the MPC (David Blanchflower and Rachel Lomax) voted against the increase, preferring to keep rates constant. In August only Professor Blanchflower voted against the rate increase. In November the majority took the view the prospects for demand were strong due to rising money growth, equity and house prices, and to falling long-term interest rates. Those who voted against an increase thought that falling energy prices and slack in the labour market would allow the economy to continue to grow without threatening inflation.

The current state of inflation 4. The estimated rate of Consumer Price Index (CPI) inflation for October 2006 is 2.4%. This compares with 2.3% twelve months ago, in October 2005. In between, inflation fell to 1.8% in March 2006 and has climbed slowly since then. Although this level of inflation is high compared with recent inflationary experience, it is well within its permitted range of 1–3%. The central projection for inflation in the November Inflation Report is that it will continue to rise until the end of the year before reverting rapidly to 2%.

1 Select Committee on Economic Affairs, 2nd Report (2002–03): The MPC and Recent Developments in Monetary Policy (HL 66); Select Committee on Economic Affairs, 3rd Report (2003–04): Monetary and Fiscal Policy: Present Successes and Future Problems (HL 176-I); 4th Report: The Current State of Monetary Policy. 2 Select Committee on the Monetary Policy Committee of the Bank of England (1998–99, HL 96-I); Select Committee on the Monetary Policy Committee of the Bank of England (2000–01, HL 34-I). 3 Kate Barker, David Blanchflower, Sir John Gieve and Rachel Lomax. 6 THE CURRENT STATE OF MONETARY POLICY

5. Given the uncertainties twelve months ago associated with the potential effects on inflation of higher oil prices, which increased by nearly 25% in the year ending July 2005, the inflation outcome may be regarded with some satisfaction. Two major contributory factors in this success have been the fall in the prices of oil and gas in recent months. The price of oil fell by 23% between August and November 2006 while, since the beginning of the year, the price of gas fell by roughly 60%.

Inflation and the labour market 6. The main concerns for inflation noted in the Inflation Reports published in 2006 were the possible effects on wage claims of the higher rate of inflation— especially Retail Price Index (RPI) inflation, on which most wage claims are based—and the degree of slack in labour markets, the effect of university tuition fees and the double digit rate of growth in the money supply. 7. In his evidence to the Committee, the Governor said that his greatest concern was the balance between demand and supply, particularly the uncertainties on the supply side. His single biggest uncertainty was the size of the labour force. He said: “We just do not know how big the population of the United Kingdom is and, because the composition of the population and its split between different groups of workers, young versus old, migrant workers versus normally resident workers, have changed in recent years, it may well be that some of the statistics we are using are not giving a very accurate reading”. One example he gave was the measure of unemployment on the claimant count which he said: “…may be an accurate measure of the unemployment statistics for those claiming unemployment benefits, but ignores the large chunk of migrant workers who have not yet qualified for unemployment benefit.” As a result he thought that this measure of unemployment may be an understatement. He contrasted this measure with the Labour Force Survey measure of unemployment which he thought: “…may be overstating unemployment because the statistics, although purporting to be drawn for the economy as a whole are drawn from sample surveys which are then aggregated up to a national total using estimates of the population which may well be out of date and inaccurate.” (Q 2) 8. Commenting on the implications for the MPC of inaccuracies in the unemployment statistics, Mr King explained that the MPC uses the rate of unemployment as a quantitative indicator of the pressure of demand on capacity in the labour market. If the measure of unemployment is biased due to not having a good estimate of the total population then this would affect their judgement about the pressure of demand on capacity. He said that this was the basis of the MPC’s uncertainty about “why a very tight labour market was not in fact pushing up wages.” (Q 9) 9. In a further comment, Mr King said that it was not entirely clear to the MPC whether wages had fully taken on board the adverse shocks to the terms of trade resulting from the increase in oil prices. He said “the question was whether firms will need to raise prices relative to costs in order to get back to a position in which it remains profitable to produce output.” (Q 2) 10. Clearly, unmeasured migration makes it difficult to estimate the amount of spare capacity in the economy. But this may be less true for the balance of the labour market, where statistics can give fairly consistent month-to-month measures of the changing balance of supply and demand in the (mainly non- THE CURRENT STATE OF MONETARY POLICY 7

migrant) labour force. Nonetheless, we accept that these are valid matters of concern for the MPC, not least because differences of opinion about the tightness of the labour market have been identified in the Minutes as one of the main reasons why members of the MPC have voted differently on interest rates.

Inflation and money growth 11. The August and November Inflation Reports drew attention to the high rate of growth of M4, which was 14.5% in the year up to September 2006, and to the potential upside risk to inflation that this poses. The Reports remark that the sharp increase in M4 in the last year or so has been driven largely by increases in deposits held by non-bank financial companies (known as other financial corporations or OFCs). OFCs include institutional investors such as pension funds. The November Inflation Report notes that the inflationary consequences of these money balances hinge on the extent to which they are eventually used to purchase financial or real assets, which would prompt further asset price appreciation, and boost demand and inflation. 12. The Governor said that the MPC paid much closer attention to monetary aggregates in the medium than in the short term and they were an important check on what the MPC was doing. It was, he thought, quite hard to map the current growth rate of any given monetary aggregate into the precise outlook for inflation two years ahead. Mr King said that deciding how much weight to give to money was not easy to work out and was something he talked about with Otmar Issing of the European Central Bank (ECB). (Q 31) 13. Some idea of the uncertainties in relating monetary aggregates to inflation can be obtained from Figure 1 below. Since the start of 2000 there has been a steady decline in the rate of growth of currency holdings and an increase in the growth rate of M4 whereas, in comparison, inflation has changed relatively little. FIGURE 1 UK Inflation and Money Growth 1985–2006

20.0

18.0

16.0

M4 14.0

12.0

% 10.0

8.0

6.0 Currency

4.0

CPI 2.0

0.0 Jul-89 Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

8 THE CURRENT STATE OF MONETARY POLICY

Inflation and asset prices 14. Part of the problem concerning the relation between money growth and inflation is that for many households money holdings are an asset, as they are a form of saving as well as a source of potential purchasing power. The down-turn in stock markets in 2000 may have caused a flight into money and so begun the growth in M4. With the growth of non-bank financial intermediaries, and the increased use of mortgage withdrawal based on the security of a real asset, conventional monetary aggregates do not convey the same information about liquidity as in the past. This was a message passed to the ECB at its November conference on the significance of monetary aggregates under inflation targeting by Mr Ben Bernanke, Chairman of the US Fed., and by the academic community who were present. It applies equally to the United Kingdom. This is one of the reasons why the Bank of England takes account of a wide range of information in addition to money supply data. 15. An alternative to targeting money growth is to use interest rates. This requires a judgement on how interest rates affect asset holdings more generally and, in particular, on the relation between assets and expenditures on goods and services. At present little is known with certainty about this. The Governor, commenting on the build up of money balances held by non- bank financial corporations, said that it was quite possible that in due course these would feed through to portfolio decisions to invest in other assets which would push up asset prices and, in turn, affect the spending of households and companies. He concluded that the main transmission mechanism of interest rates was through asset prices. (Q 35) 16. In written evidence, Professor Tim Congdon said that there is some evidence that movements in asset prices precede those in goods and services. He argued that a decision must first be made between money holding and non- monetary assets such as houses and equities. This is affected by whether assets are thought to be over-priced or under-priced relative to goods and services. (p 16) 17. The implication seems to be that if assets are over-priced, then this would lead to higher expenditures on goods and services. If interest rates were to affect asset prices in a predictable way, then this mechanism would provide a better understanding of how interest rates affect inflation. It may be noted that this argument is not the same as a wealth effect as it based on a change in relative prices rather than a change in wealth or income. 18. A common concern about asset prices, especially property prices, is that they contribute directly to inflation. The Governor told us that the MPC certainly took asset prices into account in assessing the outlook for inflation but did not target them. He said that one had to ask why house prices had increased. “Is it because people feel that incomes in the future will be higher and therefore people will be more willing to pay for the same amount of housing services, or is it because long-term real interest rates in the world economy have gone down?” The implications for inflation were different. Rachel Lomax, Deputy Governor, said that the relation between house prices and consumer spending was an incredibly difficult area, not at all well understood. (Q 19) 19. Previous concerns about asset prices were often about whether they should be included in the measure of inflation, especially house prices. What is clear THE CURRENT STATE OF MONETARY POLICY 9

from these comments is that they may well be an important part of the transmission mechanism from interest rates to expenditures on goods and services. As this does not seem to be sufficiently well understood, we urge the Bank of England to undertake extensive research on this issue.

Monetary and fiscal policy 20. The Governor was asked what had been the effect of the expansionary fiscal stance since 1999–2000 on monetary policy. The main feature of fiscal policy since 1999–2000 has been a large increase in government expenditures. In 1999–2000 they were 37.4% of Gross Domestic Product (GDP) and were forecast in the 2006 Budget to be 43.1% of GDP in 2007–8. The Treasury forecast was that as a result the debt-GDP ratio will rise from 36.3% of GDP in 1999–2000 (30.4% in 2001–2) to 38.1% in 2007–8. After that, the Government expects the debt-GDP ratio to level off. 21. In order for borrowing to level off, tax revenues would have to increase by more than expenditures. From 1999–2000 to 2007–8 government revenues were expected to increase from 38.9% (37.4% in 2001–2) to 40.9% of GDP. Thus the increase in expenditures is much greater than the increase in revenues. For 2006–7, for example, total managed expenditures were forecast to be £552 billion (43.1% of GDP) while government receipts would be only £516 billion (40.3% of GDP). 22. In the Pre-Budget report of December 2006, tax increases were forecast to raise a further £2 billion but the debt-GDP ratio was forecast to be 38.2% in 2007–8, a small increase on the Budget forecast, and to rise to 38.6% in 2008–9 and to be 38.7% in 2009–11. In the 2006 Budget, the government deficit for 2005–6 was forecast to be £11.4 billion and a surplus of £7 billion was forecast for 2008–9. In the Pre-Budget report, these were revised to a £15.1 billion deficit in 2005–6 which is 1% of GDP, and a £4 billion surplus in 2008–9, or 0.3% of GDP. Thus, despite the increase in taxes, the budgetary position has deteriorated over the year. The reason for this seems to be a revision downward to the forecast rate of GDP growth. The evidence shows that the Treasury’s forecast of economic growth has been too high for the last five years. 23. Our main concern here about these fiscal projections relates to their implications for monetary policy and, in particular, whether the fiscal stance—which is even looser than was first forecast by the Treasury— contributed to increases in interest rates. 24. Mr King agreed that in the last 5–8 years the share of public spending in GDP has risen by more than the share of tax revenues in GDP. But he said that the MPC did not single out any particular part of the balance between total demand and supply, including that due to the public sector. They looked at the path for total demand. However, as the public sector affects total demand and supply, it also affects interest rates. Mr King said that the Bank had not done any quantitative work on the separate effects of the budget deficit. One reason was that what really affects world interest rates in an integrated capital market is the world budget deficit. (Q 12) 25. We agree with the Governor that it is correct for the MPC to consider total demand and supply and not particular components of demand, and we accept that, in principle, this could imply that from time to time monetary policy would have to respond to fiscal policy. Nonetheless, we are concerned 10 THE CURRENT STATE OF MONETARY POLICY

that consistently over-optimistic GDP growth forecasts have led to over- estimates of tax revenues and hence to under-estimates of the budget deficit and borrowing requirements. This cannot be of help in setting monetary policy. This is something that we think the Government should take careful note of. 26. Commenting on the effect that world interest rates have on domestic interest rates, Mr King said that: “We look at the balance between demand and supply, we ask ourselves what goes into that balance and there is no doubt that what is happening in the rest of the world is a key input into that assessment. However, the way in which overseas interest rate changes affect our judgement is solely as an input into that judgement.” He said that: “…all central banks are very clearly focused on meeting their own price stability objectives. Of course they take the rest of the world into account, but they do not say ‘Oh gosh, Jean-Claude has put up interest rates, perhaps we ought to keep up with him’; it is not like that”. Mr King said that the MPC makes its own judgement about interest rates. (Q 33)

External appointments to the MPC 27. For some time we have been concerned about the process of appointment to the MPC of its external members. Increasingly, it appears that they lack prior expertise in monetary economics. External appointments to the MPC are made by the Chancellor. How the choice is made is shrouded in mystery. The Governor said that it was not for the Bank to make suggestions, but that it was highly proper for the Government to do so. (Q 36) 28. In written evidence, Professor Charles Goodhart, a former member of the MPC, said that the chief requirement for membership of the MPC was the technical one of being able to vary one instrument, the short-term interest rate, in such a way as to achieve the designated target most smoothly, closely and efficiently. For this purpose he thought that one needed technically capable members, not members representing constituencies, whether of gender, ethnicity, region or economic sector or industry. External members should either be reasonably expert in the intricacies of the inter-relationships between interest rate adjustments and nominal incomes, or intelligent enough to become so within a reasonably short space of time. He thought that external members should not just be drawn from senior macro-monetary academic economists in the United Kingdom, even though they do have a head start. 29. Professor Goodhart argued that since those appointees without prior macro/monetary experience would need quite a long learning period, in his view three years was too short. Four or five years would be better and the appointment should then be for one term. (p 28) 30. In our view, there is much to be said in favour of a single term of four or five years for external members. Greater transparency in the selection of appointees is also desirable. On the issue of the expertise of appointees, we believe that they should have relevant experience and that the aim should be to strike a balance within the MPC so that at least two out of the five external THE CURRENT STATE OF MONETARY POLICY 11

members have considerable prior knowledge of macro and monetary economics, which is not the case at present. The notion that it takes time to acquire such knowledge, but in the meantime a member may vote on something not well understood, is not appealing.

Conclusions 31. In our view, the Bank has continued to conduct monetary policy with considerable success. It has steered the economy through a difficult period and the prospects for inflation appear to be good. 32. The MPC has recently raised interest rates twice on a majority vote. Strong demand due to rising money growth, equity and house prices, and a falling long-term interest rate, were given as the main reasons for the increases. We have suggested in this report that the link between money growth and inflation is weak. While increases in asset prices may raise demand due to wealth effects, neither the relation between asset values and expenditures nor the role of assets in the transmission mechanism of interest rates to expenditures seem to be sufficiently well understood. We recommend that the Bank undertake further research on the links between the interest rate and inflation via asset prices as we think this is a critical aspect of monetary policy under inflation targeting. 33. We observe that if long-term interest rates are falling, then although this may raise demand in the short term, it probably implies that expected inflation is falling in the longer term. 34. The members of the MPC who voted against an increase in interest rates thought that the economy could be allowed to grow without inflation being threatened, as a result of falling energy prices and slack in the labour market. We therefore took particular note of the Governor’s remarks about the uncertainties surrounding estimates of the tightness of the labour market caused by measurement problems with unemployment and the size of the labour force due to an under-recording of immigration flows. Clearly, this is an issue that ought to be resolved quickly. 35. The division of opinion on the MPC and the uncertainties surrounding the arguments for or against increases in interest rates seem unusual. Given these uncertainties, and the importance that the Governor has previously placed on anchoring inflation expectations, it appears that the November increase in interest rates was largely a precautionary measure. 36. We think that the Chancellor should consider modifying the process of appointment of external members of the MPC to make it more transparent, and to ensure that, when they join the MPC, more members than at present have relevant expertise in macro and monetary economics. 12 THE CURRENT STATE OF MONETARY POLICY

APPENDIX 1: ECONOMIC AFFAIRS COMMITTEE The members of the Select Committee which conducted this inquiry were: Lord Kingsdown Lord Lamont of Lerwick Lord Lawson of Blaby Lord Layard Lord Macdonald of Tradeston * Lord MacLaurin of Knebworth Lord Oakeshott of Seagrove Bay Lord Paul † Lord Powell of Bayswater Lord Sheldon † Lord Sheppard of Didgemere Lord Skidelsky * Lord Turner of Ecchinswell Lord Vallance of Tummel Lord Wakeham

† until 22 November 2006 * since 22 November 2006

The Committee records its appreciation to Professor Mike Wickens, Professor of Economics, York University, for his assistance as Specialist Adviser.

THE CURRENT STATE OF MONETARY POLICY 13

APPENDIX 2: LIST OF WITNESSES The Committee took oral evidence from: Mr Mervyn King, Governor of the Bank of England; Ms Rachel Lomax and Sir John Gieve, Deputy Governors; and Ms Kate Barker and Professor David Blanchflower, External Members, Monetary Policy (31 October 2006)

The following gave written evidence: Professor Ray Barrell and Ms Rebecca Riley Professor Jagjit Chadha Professor Tim Congdon Professor Charles Goodhart Mr E J A Haygarth

Papers were also received from Professor Stephen Hall and Dr Brian Henry4 and from Rt Hon George Osborne MP5

4 S G Hall and S G B Henry, “The Current State of Monetary Policy; Is an Independent Central Bank Enough?” in The National Institute Economic Review (April 2006). 5 Paper by the Conservative Party, “Entrenching Bank Independence: Conservative proposals for entrenching the independence of the Bank of England” (January 2006). 14 THE CURRENT STATE OF MONETARY POLICY

APPENDIX 3: CALL FOR EVIDENCE The Economic Affairs Committee has decided to conduct an inquiry into ‘The Current State of Monetary Policy’. Evidence is invited by Wednesday 8 November. Since 1997 monetary policy in the United Kingdom has been delegated to the Bank of England’s Monetary Policy Committee which has a remit set by the Chancellor to control inflation. The Economic Affairs Committee has produced a number of reports on the conduct of monetary policy by the MPC. The last was published in November 2005. The aim of the present inquiry is to update this, by covering the period since then. The Economic Affairs Committee would welcome evidence on issues thought to be important to monetary policy over the past year, including any or all of those listed below. 1. How well has the MPC conducted monetary policy in the last year? 2. What are the main factors likely to affect inflation over the next twelve months? 3. Should the MPC react differently to inflation due to demand and to that due to supply shocks, for example, to increases in consumer spending and to oil price rises? 4. Monetary policy relies on interest rates affecting inflation. What, in practice, is the strength of the link between the repo rate and inflation, and what is the probable length of the lag in the transmission mechanism between the two? 5. How important for the conduct of monetary policy have the recent revisions to the measurement of GDP been? 6. The MPC seems to put considerable weight on forward rates and survey inflation expectations in its assessment of market sentiment about future inflation. How useful is this information? 7. Given the extent to which international capital markets are integrated, and the impact of US and euro interest rates on these markets, how much independence of action does the MPC have in setting UK rates? 8. Unlike the early external appointments to the MPC, recent appointments have not been monetary economists. How important is it that monetary economists are appointed? What should be the criteria for appointment? 9. At present the MPC appears to play little or no role in the selection of appointees to the MPC. What role, if any, should the Bank of England play in these appointments? 10. In public speeches, some new members of the MPC have emphasized the lack of investment in the United Kingdom and the significance of the rate of unemployment for inflation. How important are these issues for inflation? 11. Should the MPC be concerned about the behaviour of asset prices, particularly house prices? How has the stance of monetary policy affected asset prices? 12. Are there any problems arising from the separation of decision-making on monetary and fiscal policy? What have been the implications for the conduct of monetary policy of changes in the stance of fiscal policy in recent years? 3538601001 Page Type [Ex 1] 13-12-06 19:16:39 Pag Table: LOENEW PPSysB Unit: PAG1

Minutes of Evidence

TAKEN BEFORE THE SELECT COMMITTEE ON ECONOMIC AFFAIRS TUESDAY 31 OCTOBER 2006

Present Kingsdown, L Paul, L Lamont of Lerwick, L Powell of Bayswater, L Lawson of Blaby, L Sheldon, L Layard, L Skidelsky, L Macdonald of Tradeston, L Vallance of Tummel, L Oakeshott of Seagrove Bay, L Wakeham, L (Chairman)

Examination of Witnesses Witnesses: Mr Mervyn King, Governor, Ms Rachel Lomax, Deputy Governor, Sir John Gieve, Deputy Governor, Bank of England, Ms Kate Barker and Professor David Blanchflower, External Members, Monetary Policy Committee, examined.

Q1 Chairman: Governor, you have of course been uncertainties on the demand side on which one here many times before, so I need to say very little could take diVerent judgments. One is whether the by way of introduction other than to say how slow-down in the American economy will be faster welcome you are with your colleagues. We should than some might think or indeed, less fast than some like to ask you a number of questions, but I wonder commentators have suggested more recently, and whether there is something you want to say right at how far that will impact on growth in the rest of the the beginning before we start. world. There are also uncertainties about the pace Mr King: No, but perhaps I might just introduce the of consumer spending at home. We saw a sharp team formally. On my right is the Deputy Governor slow-down last year from which retail spending has for monetary policy, Rachel Lomax; on her right is since recovered, although the data have been Professor David Blanchflower, one of the external somewhat volatile, and we have seen pretty strong members of the MPC; on my left is the Deputy growth of money and credit and a fairly buoyant Governor for financial stability, Sir John Gieve; and housing market, which may well underpin consumer on his left, Kate Barker, one of the external spending looking ahead. So that is on the demand members of the Committee. side; plenty of uncertainties, but it would not be fair to say that the degree of uncertainty is any greater Q2 Chairman: You are all very welcome; thank you than normal. On the supply side, however, there are V very much for coming. May I may start? Opinion more uncertainties. These come in di erent forms. on the Monetary Policy Committee about the future On the quantity side, the single biggest uncertainty prospects for inflation and the need to change is the size of the labour force. We just do not know interest rates appears to us to be divided once more. how big the population of the United Kingdom is Can you explain to us what the issues are and what and, because the composition of the population and V you think is likely to happen to inflation in the its split between di erent groups of workers, young immediate future? versus old, migrant workers versus normally Mr King: Sometimes the Committee is more resident workers, has changed in recent years, it may t