Treasury Committee
Oral evidence: Monetary Policy Committee Appointment: Andy Haldane, HC 1236
Wednesday 30 April 2014
Members present: Mr Andrew Tyrie (Chair); Mark Garnier, Mr Andrew Love, Jesse Norman, Mr David Ruffley, John Thurso
Questions 1-26
Witness: Andy Haldane, Executive Director of Financial Stability, Bank of England, gave evidence.
Q1 Chair: Can I begin by asking you, Mr Haldane, also very familiar to us and to the Banking Commission, the same question that I asked Spencer Dale at the start, which is whether we need to keep this issue of the need for two committees under constant review?
Andy Haldane: Like Spencer, I think it is an issue that we definitely should keep under review. I am certainly open-minded myself about what the right long-run architecture is for the execution of monetary and macro-prudential policy. Whether I would change that architecture today—I am less convinced about the need to do it today for a couple of reasons, the first of which is that the ink is scarcely dry on the new legislation. The FPC is just getting going and both committees, MPC and FPC, have a lot on their plate. The FPC is not just operating a regime. It is building that regime and there is a real capacity question about whether one committee could carry both loads in the short term.
The second point I would make, and it is related and I have seen it in my time at the Bank, is the risk of macro-prudential issues being crowded out. They are not new—in a sense, the Bank of England has been in the macro-prudential game throughout most of its life but, at times in the past, those macro-prudential concerns I have seen being crowded out by some of the day-to-day micro-prudential issues. As we found to our cost, these system-wide questions are too important to be crowded out: one of the key lessons of the crisis. That is why we have an FPC. That is why we set up a separate committee: to do it properly, to not forget, for it not to be crowded out. I think there is some crowd-out risk, prospectively, if we were to fuse together FPC and MPC in the near term.
For those two reasons, I would not do it today. What I would do and what has happened, and what I think will happen more in the future is to have joint sessions of FPC and MPC. That has happened on housing and it has been very effective. I hope there will be more of that in the future. I think there is more we can and should do to better co-ordinate the actions of these separate committees near term. Longer term I would come back to your question with an open mind.
Q2 Jesse Norman: Mr Haldane, do you think the MPC is meeting too often?
Andy Haldane: Too frequently?
Jesse Norman: Yes. What on earth is the point of having all those meetings when nothing happens?
Andy Haldane: The honest answer is I do not know for sure and would hope to form a judgment on that once I am on the committee and have lived through a few rounds. I understand the logic for having monthly meetings. The news flow, particularly at the moment, is quite something and I know this from having spent time on the FPC. The FPC assesses the news on a quarterly basis. They meet quarterly, and that is quite a lot to absorb, I can tell you. The financial stability system can move on quite a long way in a quarter. Is monthly, therefore, the right periodicity? I am not sure. We know that other central banks often operate on a lower frequency. Where are we now? More than 15 years into the MPC regime. Perhaps it is a good time to ask ourselves that question. I would approach that question, personally, in an open-minded fashion.
Q3 Jesse Norman: That is interesting, thanks. One thing that has been noted quite widely is that there is a more monochrome feeling to the MPC at the moment. People’s remarks seem to be echoing others the whole time. There seems to be less disagreement between members. Why do you think that is?
Andy Haldane: Well, I suppose one very mechanical reason why that might be is that interest rates are on the floor and can’t go through the floor. There is a bit less to debate around interest rates just at the moment and, of course, there has not been so much to discuss about the second arm of monetary policy, in other words QE, over the last few months either. I think there are conjunctional reasons why there is this appearance of uniformity, homogeneity. However, I think there are already signs of some differences of views across the committee on some issues.
To take one topical issue, which is: how much spare capacity do we think there is in the UK economy right now? That is, as you know, the fulcrum of the second phase of forward guidance. We have already heard from various speeches that different members of the FPC have somewhat different judgments on what the right number for spare capacity might be. We have also heard a degree of dissent about how useful forward guidance might be. As we come closer to the point where we begin the process of unwinding this extraordinary monetary stimulus, I think the scope for disagreement is likely to pick up.
Q4 Jesse Norman: That is interesting. I once described the output gap as the Higgs boson of economic policy-making, the difference now, of course, being that Higgs boson has been discovered. We recognise that it exists. The idea of these minutiose arguments about the size of the output gap and whether that counts as a genuine disagreement is itself quite telling, but the crucial questions, which are when you should raise interest rates and by how much, do not seem to be getting a challenging—there is no one who is diverging from an apparently Governor-driven and potentially political line. I am just wondering whether you see that potentially changing. Is there any scope for that as we go forward?
Andy Haldane: I think there is definitely the scope for that to change. From what I can see and from what I have read, there is a degree of agreement that interest rates are unlikely to need to rise very immediately. There is consensus that, when that rise comes, subsequent rises are likely to be gradual and there is consensus that the final level on which interest rates may alight is likely to be somewhat lower.
Q5 Jesse Norman: Yes, but you are going to go in there and shake it up a bit, aren’t you, Andy? You are not just going to go with all this—
Andy Haldane: I will certainly come at this with the same independent mind I have brought to financial stability and regulatory issues. I do not know whether that means I will deviate from the pack or will be in line with the current centre of gravity. I can certainly assure you that I will not come in toeing a particular line and will not take as given the analysis that so far has formed the basis of the MPC.
Q6 Jesse Norman: That is interesting. Why has the Governor taken his Subbuteo set and twiddled it around between you and Mr Dale? What is going on there? What is the point of that? What is the bureaucratic point of it? Is he trying to clip your wings? What is going on?
Andy Haldane: You mentioned the move that Spencer and I are making. This was part of a wider shuffling of the pack across the Bank at executive level in which a number of us are moving role to work on somewhat different issues. I think the merit of that and the rationale for that was very much this notion of trying to join up the different arms of bank policy, this One Bank statement that you may have heard Spencer make earlier. If we are to make a success of our new, very considerable powers, we already have to join up PRA, FPC and MPC. Having people who have looked at things from both vantage points has some merit in helping join up the different committees. I think that was the underlying rationale for the shuffling.
Q7 Jesse Norman: You feel a decent embarrassment about not having been subject to a competitive process, do you, Mr Haldane?
Andy Haldane: As Spencer said, I think in an ideal world this would be an open, transparent, external process. In this particular instance, because it was a co-ordinated move-around, there was a case for stepping aside from that, but, in general, I am absolutely with you that this needs to be competitive. Can I just make one more point that picks up on an earlier one of yours?
Jesse Norman: Yes, of course.
Andy Haldane: I should say that I am not abandoning all financial stability issues either because the role of the Bank’s chief economist, my new position, is changing somewhat to embrace all of what the Bank does, financial stability as well as monetary policy. I will still be active on the financial stability front as well as on the monetary policy side.
Q8 Jesse Norman: There is a slightly Machiavellian view, which is that you had a punch up with the Governor on the issue of bank stability and now you are getting moved out of it or largely out of it. Is that a fair—
Andy Haldane: I will still be—
Jesse Norman: Do you see any of that? Is that hopeless speculation?
Andy Haldane: I will still very much be playing on the financial stability field, as I say, because this new role, and it is a new role, will embrace all that the Bank does. Personally, I am very excited both about being on MPC because it is a few years since I have been involved on the monetary policy side, even though it is still my home base, and, secondly, because, in my chief economist role I will be able, hopefully, to fuse together these monetary and financial stability issues.
Q9 Jesse Norman: But you are not going to be arguing for the leverage ratio, are you, Mr Haldane?
Andy Haldane: I may well be. I am not departing the field on regulatory issues.
Q10 Jesse Norman: Or smaller banks?
Andy Haldane: Or smaller banks. No, my views on that are not going to disappear.
Q11 Jesse Norman: They have not changed?
Andy Haldane: There is no reason for them to have changed, I don’t think.
Q12 Jesse Norman: What a shame we will not be enjoying them on the FPC.
Andy Haldane: There will still be ample scope, I think, if you wish to hear my views, for me to give them to you.
Jesse Norman: We will look forward to it.
Q13 Chair: We might find an opportunity now and again to make sure we do hear them. Just on one process point: you made clear you preferred to the switching around—as I understood it, it should not be a substitute for open competition for the normal method of appointment. Are you in fact saying we should not repeat this?
Andy Haldane: I think in the normal course of events we should go through an open, transparent, external process that levels the playing field. I think that should be the—
Q14 Chair: This is a unique event that we are not going to repeat?
Andy Haldane: Well, never say “never”, but I think it should be very much the exception rather than the rule.
Q15 Mr Ruffley: I am glad to hear that you will be speaking beyond, where appropriate, the MPC role. Presumably you will be able to do that under the banner of chief economist, so you have that wider range of ambit. I just want to ask a couple of questions about price indices. Could you tell me what your views are on incorporation of housing cost, house prices and so forth? Could you just help us with that, about what you think would be the optimal index?
Andy Haldane: Certainly, when it comes to measuring the price of the consumption basket, it is an oddity of long standing that housing plays no current role in the headline CPI. I think the vast majority of people would recognise that as a peculiarity and, of course, efforts have been made to remedy that situation. The ONS began publishing a separate CPI index that included some measure of the user cost of housing towards the beginning of last year. That strikes me as a conceptually and practically more useful measure of the price of a typical consumption basket.
It probably makes sense, given that this index is new, to spend a bit of time assessing its properties, certainly in comparing how it performs relative to how the current headline CPI performs. If one were to consistently run at higher levels than another, that would be worth knowing in advance because it may have implications for the appropriate setting of the inflation target, to give one example. Ultimately, these are issues for the Treasury, for Government, rather than us because they set the index and the framework. However, speaking as an economist, I would hope at some point in the future we might move to an index that better reflects the consumption services that people are—
Q16 Mr Ruffley: Obviously the Chancellor—Parliament technically—decides the numerical inflation target, but the Treasury will also decide on the index. In the Treasury deciding the index, presumably they will be taking advice from the Bank on that?
Andy Haldane: Yes.
Q17 Mr Ruffley: Is that something that you expect to be proffering advice on in the next 18 months to the Treasury; would you anticipate putting your view?
Andy Haldane: I would. I have not been close to the discussions so far, having not yet been in post, but I know there has already been a dialogue between the Treasury and ourselves at a technical level about this new CPIH, the new index, its properties, merits and demerits, and I foresee that dialogue continuing for at least the next 18 months.
Mr Ruffley: Okay, that is fine. Thank you.
Q18 Mark Garnier: Can I turn back to forward guidance, just following on from Mr Norman’s question a bit earlier. A hypothetical question and probably quite an unfair one, but had you been a member of the MPC back in August last year, how do you think you would have voted when it came to the question of forward guidance and in particular the 7% threshold on unemployment?
Andy Haldane: It is tough to know and I am conscious that I did not sit through all the discussions that took place across and within the committee at that time. It is hard for me to say for sure quite how I would have voted on the forward guidance question. The one thing I would say, though, and this is with the benefit of 20/20 hindsight, is that I can see the merit of us doing a little more to spell out how we see the forward path of interest rates. In the period prior to Mark’s arrival our approach had been month-by-month. Let us take one step at a time, reassess the news and not give too many clues as to what the forward trajectory might look like beyond that contained in our inflation forecasts.
What forward guidance does usefully at core is show a bit more skirt for the MPC by giving some presumptive trajectory for the future path of interest rates. I think that has some merit. Quite how you do it technically—the indicators to which you refer in providing that steer—I think that is an open question. It is certainly a question that I feel open-minded on, but I think the principle here is a very sensible one and I would certainly have voted for something that provided greater clarity on that forward path.
Q19 Mark Garnier: It is quite interesting and in fact your written submission makes the very good point that, if there was not any forward guidance and things were looking to heat up a bit, it could dampen down the recovery because people would expect there to be a higher funding cost. We start off with a very hard and very specific target, which is a 7% unemployment rate that was expected to come sometime in 2016 and, as it turns out, everybody was, happily to a certain extent, wildly wrong in it. The second phase is much fuzzier. Again, this is a slightly hypothetical question, but do you think we should harden up the guidance for the second phase or do you think we should not have had it quite so hard for the first phase? The reason I ask that is because it is a very big psychological jump from one type to another.
Andy Haldane: Yes. You will know because you and I have discussed it previously that, generally speaking, I am in favour of quite simple guide paths and rules. I think that was the strong rationale for the first phase of forward guidance, being centred around a relatively small number of simple guide paths. What our experience has revealed is that sometimes the simple guide paths are not sufficient to fully describe the future evolution of interest rates, of the economy. In that respect, the second phase, which focuses on slack or spare capacity, is a rather more all-encompassing measure of what is likely to generate future inflationary pressures.
For example, the unemployment rate is, at one level, a good measure of labour market slack, but it does not capture under-employment as distinct from unemployment. We think, internally, that under-employment, people working fewer average hours than they might desire, is an important factor for a relatively large number of people at the moment. Moving from the unemployment rate to a measure of slack enables us to take into account those factors and, in that sense, makes some sense.
I would make just one more point, which is, standing aside from the focus, “Is the headline unemployment rate a measure of spare capacity?”, for me, overridingly, the most important message of a forward guidance nature that came out of the MPC this year was the threefold statement that rates would not be rising immediately, that when they did rise it would be gradual and that the final resting place for interest rates would not be at the levels we have seen in the past. In some ways that encapsulates better than any indirect metric what the MPC sees as the most likely shape for interest rates and, therefore, would be most useful to businesses and households when planning their spending and saving decisions.
Q20 Mark Garnier: You raise quite an interesting point about the unemployment number and the amount of under-employment within that. I will ask the same question I asked Spencer Dale before you about the data. Do you feel that you have enough granularity in the data that are presented to you over this? We made reference to the Higgs boson particle and the output gap and the use of the output gap. Do you feel you know enough about what is going on in those data to be able make as confident a decision as you would like to or do you think there could be more information that we could try and find from somewhere else?
Andy Haldane: I think there is very considerable scope to improve both the quality of our existing data and prospectively expand the range of data that we have at our disposal to tell stories about risks either to price stability or to financial stability. One of the aspects of the strategy plan that Spencer mentioned earlier was for the Bank to invest, much more than the past, in new data architecture and in skilled personnel to develop so-called data analytic techniques to better tell stories about these data.
Let us take the example of housing that you touched upon previously. I would say at present we currently do not have the level of granularity or cohort analysis that would be desirable to answer the question that you asked Spencer, which is: how much of a squeeze would be felt by different segments of the mortgage population if and when interest rates start to rise? We have some proximate answers to that right now from our surveys, but we do not have the granular loan-by-loan, household-by-household information that we would like. The good news is that we are going to make an investment in just that sort of database so that we can begin to answer those sorts of questions.
Q21 Mark Garnier: So you will know how fat those tails are?
Andy Haldane: Yes.
Mark Garnier: That is very helpful.
Andy Haldane: That is very much the plan.
Q22 Mark Garnier: Will that come in before it starts to be a problem, and we do not understand how big the problem is? Will that be, in effect, early enough?
Andy Haldane: I do not think we will have the database we would wish medium term, but I think we can and will gather more between now and that point. To give one example; the Financial Conduct Authority have, for consumer protection reasons, a very detailed database on every new mortgage loan taken out and some of the characteristics of the households that are taking out those mortgages. That is not a database with which, to date, we have done very much, if anything in telling stories about risks to the financial system or in telling stories about risks to the economy.
Of course, we should use that data to help us when reaching our judgments about the impact of an eventual interest rate rise on the balance sheets of households. There are already databases in-house that we can make better use of and I hope over time we can build better databases still to help our assessment of risk.
Mark Garnier: Fantastic, thank you very much.
Q23 John Thurso: Andy, my apologies for not being here when you kicked off. I sit on the House of Commons Commission and we had to have a quick meeting this afternoon, but there was one question I wanted to ask and which I am reliably told nobody has so far asked you. We have heard a lot recently about an equilibrium, or normal rates of interest. Is there, in actual fact, such a thing as a normal or equilibrium rate of interest?
Andy Haldane: It is certainly a concept that is quite elusive to pin down.
Q24 John Thurso: If the concept is elusive to pin down then surely the rate must be almost impossible.
Andy Haldane: As a practical matter. I think, generally speaking, you would expect over the medium term that the real interest rate in an economy would be roughly in line with the growth rate of that economy, but we do know that if we look at, for example, the pattern of real interest rates globally over the past 20 or 30 years they have not been a constant. In fact, they have been on a secularly downward trend. Martin Wolf’s piece in the FT today discusses some of the reasons why that might be; if you like an excess of desired global saving over desired global investment. What might have been an equilibrium real rate 30 years ago looks rather different today. If the 1990s equilibrium global real rate was 4%, during this century it looks more like 2% and since the crisis closer to zero or 1%. I think this is a hard thing, practically, to pin down.
Q25 John Thurso: I can’t remember which of your colleagues on the MPC did a speech but it was within the last six months and I remember reading it. I apologise now to whoever was the author of it, but they posited that the equilibrium rate pre-crash was probably in the order of, from memory, 4.5% to 5% and that now it is probably two points below. When we return to normalcy it will be lower than that and that is an impact of the crash. The question is: was there that equilibrium before? Is there going to be an equilibrium and is the equilibrium after going to be that two points below where it was? It is just a difficult concept I am asking the question about.
Andy Haldane: I think the MPC member in question was David Miles.
John Thurso: That is it, thank you.
Andy Haldane: He was echoing a sentiment that was also set out, I hope reasonably clearly, in our February inflation report. The point we made there relates back to the point I raised earlier. If you think of 5% as having been perhaps the average historical norm for nominal interest rates in the UK—roughly 3%, say, real rate and the 2% inflation target—then in future we might expect nominal rates rising to a somewhat lower level than that for the same monetary stance. The reasons given for that include the fact that in future, for example, you would expect banks to charge a somewhat higher risk spread for their borrowing than they did in that pre-crisis period. Risk is somewhat better priced. Spreads are somewhat higher. That would mean we could get away, at the Bank, with setting a somewhat lower rate in future to achieve the same monetary stance.
Q26 John Thurso: For the foreseeable time horizon of a generation or whatever the lessons of the crash will have been learnt such that risk will be properly priced in margins, which means your rate can be set at a level to account for that.
Andy Haldane: That is right. Some of the factors referred to as explaining why a lower rate could be right in the near term, for example, the pricing of risk. There might be headwinds to growth at the moment from the overhang of debt on the balance sheet of Government or on the balance sheet of households. Those headwinds would lead us to expect a somewhat lower nominal interest rate for the foreseeable future. At some point, those headwinds will dissipate or disappear and at that point the equilibrium might begin to nudge up again.
Q27 John Thurso: The last question is, on the basis of that, which is a fascinating concept and quite hard to grasp as you said at the outset, is it relevant in policy-making or is it just a neat bit of academic thought on the side of what is happening, the decisions that are being made?
Andy Haldane: No, I think it is real. I think it has practical relevance. If we can usefully give some guidance about where we would expect nominal interest rates to settle once the slack in the economy has been absorbed, that is useful information for households to have when planning the size of their mortgages and for businesses to have when planning their borrowing. I think it does have practical relevance. How precise we can be in pinning this down in percentage point terms—I think that is a bigger quandary.
John Thurso: I think that is a good place to end, Chair.
Chair: In that case I will. Thank you very much, Mr Haldane, for coming in to give evidence to us this afternoon. It was extremely interesting as usual. We touched on a very wide range of subjects. We will now go into private session. Thank you for coming.
Oral evidence: Appointment of Andy Haldane to the MPC, HC 1235 10