UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 767 HOUSE OF COMMONS ORAL EVIDENCE TAK EN BEFORE THE TREASURY COMMITTEE 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 1. This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others. 2. Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings. 3. Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant. 4. Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee. 1 Oral Evidence Taken before the Treasury Committee on Tuesday 27 November 2012 Members present: Mr Andrew Tyrie (C hair) Mark Garnier Andrea Leadsom Mr Andy Love Mr Pat McFadden Mr George Mudie Mr Brooks Newmark Jesse Norman Mr David Ruffley John Thurso ________________ 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 B roadbent, External Member of the Monetary Policy Committee, gave evidence. Q1 Cha ir: 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 d ays”. Sir Mervyn King: Exactly, and today it is seven months and three days, because that was merely five days ago. Q2 Cha ir: 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 C hancellor 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 2 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 Cha ir: 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 o f 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 inflatio n 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 Cha ir: 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 Cha ir: Governor, in your answer to Stephanie F landers, 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, 3 certainly have fed through to higher funding costs for banks, which temporarily we have managed to offset with the F unding 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 Cha ir: 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-mak ing? Sir Mervyn King: Yes. I think so, yes. Q8 Cha ir: 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 infla tio n 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 C hina 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.