Treasury Committee
Oral evidence: Appointment of Professor Kristin Forbes to the Monetary Policy Committee of the Bank of England, HC 206.
Wednesday 18 June 2014
Ordered by the House of Commons to be published on 18 June 2014.
Members present: Mr Andrew Tyrie (Chair); Steve Baker, Mark Garnier, Mr Andrew Love, Jesse Norman, Mr David Ruffley
Questions 1-71
Witness: Professor Kristin Forbes, Professor Kristin Forbes, Jerome and Dorothy Lemelson Professor of Management and Global Economics, MIT Sloan School of Management, gave evidence.
Q1 Chair: Good afternoon, Professor Forbes. This is your first appearance before the Treasury Committee and we hope it will not be your last. Could I begin by asking you whether QE is fiscal policy or monetary policy or both?
Professor Forbes: First, Chairman and members of the Committee, thank you very much for making the time to meet me today; I know you have very busy schedules. But to your question: QE, what exactly is it? It is monetary policy, without a doubt. The way it works, the goal of it is to lower the cost of borrowing, lower interest rates, and through a number of different effects to stimulate the economy through monetary policy, not through fiscal policy.
Q2 Chair: In that case, it is entirely a matter for the Monetary Policy Committee?
Professor Forbes: It should be a primary responsibility of the Monetary Policy Committee, but there could be fiscal implications over time, based on as QE is unwound. I think it is helpful if a central bank is going to embark on monetary policy, to have the support of the Government before embarking on that, especially if there could be fiscal implications in the future.
Q3 Chair: Seeing as it has fiscal implications, you still nonetheless think it would be unreasonable to say that it is an aspect also of fiscal policy?
Professor Forbes: The way economists bucket these, quantitative easing falls in the bucket of monetary policy, not fiscal policy.
Q4 Chair: Yes. I was looking to see whether you might take that thinking a bit further, but do you think it has also a crucial role in maintaining financial stability?
Professor Forbes: The way the Bank of England is structured is that the primary responsibility for financial stability is the Financial Policy Committee, the FPC, so if there are risks about financial instability from housing or whatever aspects, the first line of defence against that is going to be the FPC. They have tools where they can directly target whatever risks there are that you are worried about with financial stability. Monetary policy is a very, very blunt tool if you are worried about financial stability risks, especially if those risks are in one sector, so I think the division of labour at the BoE makes a lot of sense. If you have financial stability concerns in a small sector, use tools that can target that sector, which are tools that FPC has. Monetary policy run by the MPC could be a last line of defence if you are worried about broad risks to financial stability, but I think it makes sense to start with the FPC, as the mandate is currently written.
Q5 Chair: You are providing a very orthodox Bank of England line, if I may say so, to these questions, which is very understandable in the circumstances. Do you think that the MPC should raise interest rates first or unwind QE first?
Professor Forbes: I think that the path that has already been laid out by the MPC—and again, I was not part of those discussions, but as an outsider looking in—the order in which they have laid things out does make a lot of sense. Interest rate policy is something that banks have had experience with for years, for decades. We have a pretty good idea of roughly how it works, so as a first line of adjustment to changes in the economy that makes sense as a place to start. QE, it is harder to predict the effects, it is harder to manage, so it makes sense to save that as a secondary policy.
Also, we do not know what is coming. There are a lot of risks out there, especially in the global economy, and there could be a chance that at some point we will need to loosen monetary policy instead of tightening it, so it makes sense to have base rate moved up so that then if in an emergency we had to adjust rates, we would have some flexibility to do that. So I think it does make sense to start with interest rates and then move to adjusting asset purchases at a later date.
Q6 Chair: Could I just take you to something in your note, where you say, and I quote, “Any unwinding of QE in the UK should be carefully communicated in advance and initially proceed at a gradual pace to minimise any market disruption and allow the MPC to evaluate any impact”, but you also say that, “Waiting too long to unwind could contribute to a lack of sufficient risk assessment”. What signs would you look for to suggest that a lack of sufficient risk assessment is occurring?
Professor Forbes: No, I think that is a very difficult trade-off and I think we are going to have to watch very closely on the MPC. Just to explain, the first risk, if you act too quickly and act with too much surprise, we saw firsthand in the United States what could happen in the spring of last year, when members of the Fed started to talk about tapering at some point in the future. There was a very violent reaction in interest rates in the US and around the world, so obviously we want to avoid that risk and have time to prepare this. This is something I have written a bit about, so I could go on for a while, but I will not. So we have learned the lesson: you need to prepare for this, do it gradually.
But at the same time, if markets believe that interest rates will not be adjusted at any point, there is this tendency for investors not to assess the risks or not to adequately prepare for when rates do start to move, so that is something that we will have be watching closely. One way of monitoring that, something that is going on right now at the Bank of England, is reviewing mortgages now to ensure that mortgage lending is only provided if the borrowers and banks could be prepared for changes in interest rates and be able to handle that. That is one way of getting people ready in advance and preparing for at some point when interest rates do start to normalise.
Q7 Steve Baker: Professor, you just mentioned the violent reaction of the markets to what monetary policy makers have said. Would you accept that monetary policy makers are big players in markets, who can produce herding behaviour through setting expectations?
Professor Forbes: Certainly monetary policy has powerful effects on markets. We saw that, as you said, last spring, but I think it is also important to note that while there was initially the violent reaction to monetary policy talk about tapering in the United States last spring, when the US then did start to taper around October/November, last fall/winter in the United States, there was barely any market effect, so that showed that when markets are prepared for changes they will have a less violent effect. Also, when those adjustments were made, it was a period of stronger growth in the US and stronger growth in the global economy, so it shows that when an economy is fundamentally strong and you have strengthened it, changes in monetary policy, especially if well-communicated, should not have such strong effects on markets.
Q8 Steve Baker: Thinking about that communications plan, would you accept that if communication is done badly, it is conceivable that these violent reactions that the market may have could produce financial instabilities?
Professor Forbes: I think that communication matters, but also the overall economic outlook matters quite a bit too, so those are all things that need to be factored in.
Q9 Steve Baker: Okay, thank you. In the recent paper from the Bank about money creation in the modern economy, there is a section that reads, “When banks purchase Government bonds from the non-bank private sector, they credit the sellers with bank deposits”, creating money. Could you just explain how the process of unwinding QE will not result in further money creation through that process?
Professor Forbes: Again, I have not been party to the discussions yet at the MPC, but how I assume the unwinding of QE will happen is, first, the natural step would be to just let some of the gilts that have been purchased expire naturally, so some of the gilts that expire, not renew them, not purchase them again, and that will slowly lead to a decline of the amount of assets held by the central bank. The one thing about the way that QE has been done in the UK though is many of the gilts that are purchased are very long term. I have seen some estimates that even if you waited for everything to unwind naturally, you would still hold half of the gilts that have been purchased by about 2022, so that would be a very gradual way to unwind. My guess is if the economy continues to show the strength that we have seen recently, they are going to want to, at some point, do a faster unwinding than waiting for it to unwind naturally.
Q10 Steve Baker: That is really the point I am making. During that faster unwinding, will it be necessary for the Bank of England to make sure that banks do not end up creating deposits, further expanding the money supply, during that process of buying bonds from the Bank of England?
Professor Forbes: The money supply is one thing that is constantly tracked, I assume, by the Monetary Policy Committee, so they will have to watch, but also watch how that feeds through into the overall economy. Right now, there is still limited lending by banks and that is one of the concerns that I know this Committee has talked about, especially lending to small and medium enterprises.
Q11 Steve Baker: What I am really driving at is the institutional process of deposit creation and whether you have a plan for making sure that the banks do not end up creating deposits when bonds are sold so that money is created both on the way into the Bank of England and on the way out.
Professor Forbes: Yes. Again, I have not been party to these discussions, so I assume this is something that the MPC has talked about and thought about.
Q12 Steve Baker: Perhaps we can move on to the distributional effects of QE, because the effect of asset prices changing in response to QE has been fairly well discussed. Do you think in principle MPC members should be concerned about the distributional effects of QE?
Professor Forbes: I think everyone should think about the distributional effects of any policy they do. Any time you do monetary policy, there will be distributional effects, whether it is standard adjusting interest rates or QE, it always has distributional effects. The distributional effects go in both directions and I think that is also always important to keep in mind. If policy leads to stronger growth, stronger growth creates jobs and that is generally good for the economy.
Managing inflation at its target has distributional implications. Higher inflation tends to hurt lower-income workers more than higher-income workers, so meeting the inflation target is another way that monetary policy will affect distribution. Higher asset prices benefit the overall economy. It tends to benefit those who hold assets and equities more, but it also can benefit middle income earners, anyone who holds a pension. For people who live off pension payments that are largely fixed income, lower interest rates lead to lower payments, so there are distributional effects in all directions. I think the central bank or the BoE should think about these. I have been impressed with how much discussion there has been over the last few weeks, but at the same time I do not think that should be the target, especially with the MPC.
Q13 Steve Baker: The Governor just made a speech about inclusive capitalism. It seems to me that that is a reflection of the reality that people’s faith in what they currently conceive as capitalism and the way things work as it is, has been undermined. To what extent do you think these distributional effects, which are a consequence of explicit policy choices by the MPC, and those policy choices have contributed to undermining people’s faith in the market process?
Professor Forbes: Any policy has distributional implications, but the MPC’s goal is to target inflation with a secondary mandate for growth and financial stability. Meeting that target I think is the best thing for everyone at all levels of the income distribution and the MPC should focus on that target. That is going to have the best effect for the economy as whole. Muddying that by focusing on specific aspects of the income distribution, it seems that that should be a role for Government, for elected officials, because those are much harder choices to make, not for the MPC.
Q14 Steve Baker: Perhaps I could you give a very specific example. We heard in an evidence session last week that the reason why exit costs from interest rate swaps have been so high is because the interest rate environment has been below the level that was within anybody’s expectations. In other words—if I may, I will use my own words rather than the evidence—if I paraphrase that, the deliberate choices of the Monetary Policy Committee to avoid the catastrophe that was expected have resulted in interest rates so low that small businesses have been absolutely hammered and believe that the products have been mis-sold to them precisely because monetary policy pushed those rates down. Would you accept that, for all those small businessmen who have ended up facing huge exit costs from complex products they did not understand, that they have principally suffered because of MPC decisions?
Professor Forbes: You see, I find it hard to go from low interest rates to hurting small businesses. Usually it is the other way around—higher interest rates tend to restrain lending overall. When lending in an economy overall contracts, usually the first people hurt and the last ones to get access to credit are the small businesses. I have done some work on small businesses and the financial constraints of small businesses. It is usually a constrained financial sector, higher interest rates, anything of that kind that hurts them, so I am not sure how higher rates would benefit small businesses.
Q15 Steve Baker: Perhaps what we could do is draw your attention to the evidence we heard last week, but the point was the calculation of exit costs from swap arrangements ends up giving a higher exit cost if the interest rates are lower than expected.
But if I move on to the last area I wanted to explore, do you think that asset prices end up resulting in a misallocation of capital? We are talking about redistributional effects through money, but do you think that the capital reallocation effects of monetary policy are in any way significant in the market process?
Professor Forbes: I think the way QE works is through a number of channels. One of the effects has been that higher asset prices make people feel wealthier and then they go and spend more and consumer spending has been a key part in driving the recovery. The initial phases of this recovery in the UK were largely consumer spending. It has taken a while for the other legs of the recovery to start to kick in. So yes, higher asset prices have been part of the recovery, part of driving consumption. I think that is very clear. I am not sure if that is exactly what you were getting at.
Q16 Steve Baker: Not quite. Do asset prices result in capital being allocated in particular ways, and if so, does that mean that, in the long run, the allocation of capital in the market will have been substantially affected, not only by QE, but also by low rates?
Professor Forbes: Sure, we saw some shift in allocation of capital. That was part of the goal of QE, but as monetary policy adjusts, we will see some shift back. I think it is very hard to say what is right and wrong. That is where I usually trust the markets to allocate capital.
Q17 Steve Baker: That is a very interesting point. How can you trust the markets to allocate capital when the market prices and their structure are being deliberately altered by the Monetary Policy Committee?
Professor Forbes: But that is part of the goal of the Monetary Policy Committee: to lower interest rates to spur recovery and support growth and that is part of how lower interest rates do work through the economy.
Q18 Steve Baker: Okay. I imagine we are going to return to this subject several times.
Stephen King recently argued in The Financial Times that a narrow focus on price stability ultimately proved extremely damaging, and he said that we should move away from inflation targeting in monetary policy. Do you think there are more effective forms of monetary policy that we could use in the UK?
Professor Forbes: It is always tempting to try to find a better way to do monetary policy. Many countries have tried other ways and most have not done nearly as well. I do not think any have performed nearly as well as inflation targeting, and that is why most countries use inflation targeting today. I think before trading it in, you would have to have a very good and coherent argument of why and what would be better and why it would be better, and not just why it might be better over some short part of the business cycle—I know there are a number of arguments for switching at certain periods—but why it would be better over the long part of the business cycle. That is where inflation targeting has done very, very well, and any time we talk about switching regimes or switching the way monetary policy is done, you could risk undermining stable inflation expectations. The BoE has done very well at stabilising medium-term inflation expectations. I would be very cautious about meddling with that.
Q19 Steve Baker: As Governor of the Central Bank of Canada, Mark Carney made a speech at Bloomberg on 24 February 2012 talking about different approaches. In particular, he discussed nominal GDP targeting, but the thing I am most interested in is that he said, “The stronger critique of the Austrian school is that inflation targeting can actively feed the creation of financial vulnerabilities, especially in the presence of positive supply shocks”. He went on, “Inflation-targeting central banks may be compelled to respond to the consequent ‘good’ deflation by lowering interest rates. From the Austrian perspective, this misguided response stokes excess money and credit creation, resulting in an intertemporal misallocation of capital”. He dismissed this approach by saying that it was to consider, “Monetary policy in a vacuum divorced from broader macroprudential management. Moreover, it offers only a counsel of despair”. Are you familiar with that set of arguments about the intertemporal allocation of capital?
Professor Forbes: Yes.
Q20 Steve Baker: Do you think that they are true but have to be discounted or do you think that they can be dealt with through macroprudential management?
Professor Forbes: I think that is a very good point and I should have made it earlier, so thank you. I think that the biggest shortcoming of inflation targeting that we learned painfully over the last few years is that it does not take into account financial instability that can build in asset prices especially. I think that is where the new framework, especially the one that the BoE is really leading the world in starting to think about, is of having one committee focus on monetary policy, inflation targeting, and then another committee focusing on financial stability. That should be a way of addressing what was one of the previous shortcomings of inflation targeting, addressing financial stability directly through the FPC.
These tools are new and they have only been used selectively in different countries. We do not know exactly which tools will prove best, we do not know exactly at what levels to set some of the new prudential regulations. We are going to have to take some time to get it right, but from my understanding of the different procedures that have been followed in different countries, the BoE really seems to have best practices right now from what we know. I think that is one reason why I am excited to be here: I would like to be a part of this and hopefully make the system work and figure out exactly how to make it work.
Q21 Steve Baker: How will the Financial Policy Committee obtain the information it needs to establish whether the Monetary Policy Committee is feeding financial vulnerabilities?
Professor Forbes: My understanding is that they are tracking a host of financial indicators throughout the economy. I think they are trying to get new data, but they are tracking things such as loan to value ratios, debt to income ratios, all sorts of ratios throughout the economy. They are having banks do different stress tests, different scenarios, to see how they could handle changes. I think that is a good start. Again, I am not there, so I do not know all the tools they are using, but it sounds like they have a whole array of tools they are working on and also a whole list of new pieces of data that they would like to collect and they are trying to get into place.
Steve Baker: Thank you very much.
Q22 Jesse Norman: Picking up on the question that was raised by Steve, just to be clear, you would be opposed to nominal GDP targeting?
Professor Forbes: I did not say that. I said inflation targeting seems to work better than any other method of setting monetary policy than we have tried to date. Based on the historic experience, I have not seen a good reason to change and try anything new. If there was a decision made to try anything new, I think it would have to very, very carefully be looked at, thought about, and thought about how it would work over the whole business cycle, not just over a short term.
Q23 Jesse Norman: So as matters currently stand, you would be opposed to nominal GDP targeting because you do not want to change from what you have at the moment?
Professor Forbes: I would need to see very strong—
Jesse Norman: You can just say yes to that.
Professor Forbes: No, I have not looked into it for the UK in detail, but at this point I do not see good strong arguments to change the system, and then also it is the Government’s mandate, not mine, for what the target is.
Q24 Jesse Norman: Yes, but I do not think we are expecting members of the Monetary Policy Committee to accept the mandate in a completely docile way. We are expecting them to interrogate it and offer reflective arguments, if required, against it in the public interest, so I do not accept that argument.
Can I ask you a question, which is have you ever worked in the UK? You obviously have a stellar CV. Have you worked in this country?
Professor Forbes: I have worked internationally quite a bit. I travel constantly. I have spent a bit of time in the UK, for example, in the last two summers we have spent a bit of time here. I have not officially held a job or a work visa in the United Kingdom.
Q25 Jesse Norman: But you have never spent any significant period of time, more than a few weeks?
Professor Forbes: I spent over a month last summer.
Q26 Jesse Norman: Okay. I was just reading your responses. How much experience do you have of monetary policy? How much actual thinking have you done about monetary policy?
Professor Forbes: I have thought extensively about macroeconomic policy, which incorporates a number of issues that are closely related to monetary policy and highly relevant to monetary policy in the United Kingdom. For example, a lot of my academic work is on capital flows. The movement of capital obviously is highly relevant to monetary policy, especially in the United Kingdom, which is an open economy, and capital flows are so large relative to GDP. I have done quite a bit of work assessing risks and vulnerabilities, especially vulnerabilities to shocks from around the world. The United Kingdom is also very heavily affected by shocks around the world and that is a key determinant on all the variables that are critical to monetary policy.
I have also spent quite a bit of time working on macroeconomic data, although largely internationally, so for all types of countries, of which the UK is obviously always an important country, and also in the United States when I worked at the White House in the Council of Economic Advisers. One of our key jobs in that role was analysing macroeconomic data, understanding macroeconomic data, so although obviously I will have to adjust and learn more about specifically the UK data, there is a lot of similarity, so I am very comfortable working with the data, which is critical for monetary policy.
Q27 Jesse Norman: That is very interesting and reinforces what you have said in your submission, but it does suggest that you have not actually done much of any work on what you would consider absolutely core issues of monetary policy. Is that right?
Professor Forbes: You see, I would beg to differ. I think the issues on which I have focused, especially much of my research in advising, is all incredibly important for monetary policy.
Q28 Jesse Norman: I do not know exactly know the work you have done, but I imagine they are about international capital flows, so core issues of what domestic monetary policy ought to be, it seems to me you have not written anything on that. I do not know if that is true or not. Is that true?
Professor Forbes: I have written quite a bit about the effects of monetary policy on economies, and what affects economic variables that are key to setting monetary policy. The other thing is that I think one of the benefits of the MPC is you have nine people with different backgrounds. One thing I have learned being at a management school is you need different backgrounds, so I do bring in a set of skills that is useful.
Q29 Jesse Norman: I think you are interrogating my question a little too much. I am not advancing a position on whether you should or should not have that experience, I just want to know whether in fact you have experience of the core issues involved in deliberation about levels of interest rates, levels of inflation, those things you might consider absolutely foundational to monetary policy. You have some relevant experience around the outside, but I have not seen any published work that you have done yet that specifically speaks to those issues. It does not matter; I just want to know what the truth is. It sounds to me that that is right.
Professor Forbes: You see, I would phrase it slightly differently and say many of the issues on which I worked are core to monetary policy. How you can set monetary policy without thinking about capital flows and exchange rates and things like that, that would be a problem, I think.
Jesse Norman: I understand. Thank you.
Q30 Chair: If you could just elaborate a little bit on what those areas that you have done, areas on which you have worked where you feel there is direct relevance to the MPC’s work and the way they operate, that would be very helpful to the Committee.
Professor Forbes: Okay. Primarily it is capital flows, understanding the movement of money in and out of countries. Flows are obviously massive for the United Kingdom and they also have a tremendous effect on interest rates. One reason why global interest rates are so low in the United Kingdom as well as much of the rest of the world is shifts in the global patterns of capital. More and more we are seeing interest rates around the world determined by global factors, global capital flows, not just what a central bank does in one country, so that is one area I can bring direct expertise for the United Kingdom.
Another area is contagion, financial instabilities that result from different shocks, different events around the world. The UK has been directly affected by what has happened in Europe the last few years.
Q31 Chair: Isn’t that something more relevant for the FPC than the MPC?
Professor Forbes: No, but all of these factors will feed through into inflation. For example, the latest news from Iraq, oil prices have just jumped a bit and that could directly affect inflation. That is directly the primary target of the MPC. I will bring an understanding of how all of these shocks around the world can directly affect these variables that are in the mandate.
Q32 Jesse Norman: Could you just briefly summarise what you take to be the Bank’s policy on forward guidance?
Professor Forbes: This is a hard one for me to answer because I have not been part of forming forward guidance. I do not know exactly what they have intended or what they have said in the meetings. I can tell you my interpretation of what I have read as a member of the public. My interpretation of what I have read in the different stages of forward guidance is that the MPC has always made it clear that they will set interest rate policy dependent on the data and dependent on the economic outlook. The first phase of forward guidance, some central banks were choosing to make it what is called time contingent, where they commit to keep rates low for a certain period, and at the Bank of England, they chose not to do that. They chose forward guidance that was state contingent and linked it to the state of the labour market, to unemployment, as a proxy for the economy. So I think right there they sent a signal, “We are not telling you what time we are going to adjust interest rates, but we are telling you it depends on the state of the economy”.
Then in the second phase of forward guidance, they had a long list of things they were looking at: in setting the path of interest rates, any increase would be slow and gradual and so on, and one point in that list was that it will depend on economic developments. I think again they were highlighting that the evolution of rates will depend on economic developments. My understanding is the most recent comments by Governor Carney continued that trend and reminded people of that trend: it does depend on the economy. I think that my take on it is the BoE has been trying to provide as much guidance as it can while constantly reminding everyone it still depends on the data, so this is our best guess, best on our forecasts for the future.
Q33 Jesse Norman: Do you think it is a substantive monetary policy if its anchors are: it should be based on the data and it may change depending on economic developments?
Professor Forbes: I think that is how it has to be set, and as a member of the MPC, that is how I will make my decisions. I think we do need to look at the data. The data is constantly coming in. Especially right now in the UK there are a number of unusual patterns in the data and it is hard to understand certain aspects of the economy.
Q34 Jesse Norman: No, sure, but I think you missed the point of my point, which is that those things are so obvious that they should be part of all policy making and therefore it cannot be distinctive about this piece of policy making or about monetary policy as such. I guess I am wondering whether you think that it amounts to a substantive policy or whether it is really just about a lot of arm-waving designed to allow the Bank to do whatever it wants.
Professor Forbes: No, I think is them doing their best to say, “We want to give—
Q35 Jesse Norman: What is the constraint then? Okay, so we saw the employment figures are not a constraint because it was no sooner announced—the target or the threshold—than it was broken. It turned out that did not make any difference. Then it looked like it was going to be early next year, until the Governor said it might be this year. Where is the substance? All it really amounts to is a lot of arm-waving until the Governor tell us when he thinks rates are going to go up or down.
Professor Forbes: Again, I am not in the meetings, yes, but my—
Q36 Jesse Norman: Tell me where the substance is. That is what I want to know.
Professor Forbes: I think the substance is that the target of the MPC is to set medium-term inflation expectations. Unfortunately, we do not know where inflation will be in the future, and the way monetary policy works, there is a long lag between when you address monetary policy and when it affects the economy, so you have to make decisions in advance based on what data is available. I think it has been very useful that they have been trying to highlight, “These are some of the data pieces we look at, then we are going to put them all together to try to then give us the best understanding we can of where inflation will go and that will determine what we have to do”. I think it has been helpful that they are trying to tell us some of the data points they are looking at.
Q37 Jesse Norman: Do you think households will pay above bank rate either on mortgages or personal loans when it starts to move upwards? Do you think that will be a feature of the recovery from the crisis?
Professor Forbes: Excuse me, could you repeat the beginning of that?
Jesse Norman: Do you think that households will pay, either on their mortgages or on their personal loans, at a higher rate above bank rate when the economy starts to recover and interest rates go up?
Professor Forbes: Most interest rates I believe are variable rates, so the majority have variable rates, so interest payments will increase as rates go up. That is how the market is intended to work.
Q38 Jesse Norman: Will the margin increase? That is the question I am asking.
Professor Forbes: Yes. I do not want to predict, but traditionally that is how it works.
Q39 Jesse Norman: Okay. In your background—it is a final question, Chairman—in your own very impressive CV, has there ever been a time where you have been in an institution and found yourself strongly disagreeing with the conventional wisdom that that institution has adopted? Could you tell us about an example or two if there has been?
Professor Forbes: Certainly. When I started at the White House in 2003, I was one of three members of the Council of Economic Advisers, and it is supposed to be an independent group giving unbiased, unpolitical economic advice to the President and his team and some members of the Cabinet. When I first started, 2003 was right after when China had joined the WTO. There was tremendous concern about China, China’s rapid growth, China’s emergence as a major player in global trade patterns and there was tremendous concern in Washington about what that would do to US exporters and US competitiveness. There was also a period of peak concern about China’s exchange rate and whether it was set at a fair value and the US could compete. The majority of people at that time were leaning towards a strategy of taking a very tough stance on China, of putting tariffs on China, of starting a number of trade issues with China and taking a very tough line on China’s exchange rate.
That is where I felt, after a lot of economic analysis, that that did not make the most sense, and I spent a lot of time creating a lot of material and briefing members of the Cabinet, the President, the White House staff on how trade with China benefited the US as a whole, how even China’s undervalued exchange rate meant lower import prices that kept inflation down, how some of the greatest benefits were for low-income individuals. Low-income individuals in the US spend the majority of their income on goods at places like Walmart, so cheaper imports from China helped lower-income individuals much more. I went through the costs and benefits of trade with China and felt that on the whole, it made much more sense to engage positively with China, to engage positively on the exchange rate, not to start a trade war with China, not to name them as a currency manipulator, which could have led to large tariffs and retaliation.
That was very much against where the majority seemed to be leaning when I came in, and I slowly, after a lot of just looking at the data, looking at the material, convinced people to take a very different tack, and then we took a stance of positive engagement and trying to work through currency issues. There were still a number of very legitimate concerns, intellectual property rights was a big concern, and there was some real concern from manufacturers that had to compete with China when its currency was undervalued, but we felt that working through those more under the radar screen, working through them with positive engagement and not immediately slapping on tariffs and starting all these cases in the WTO was the right approach.
Jesse Norman: Thank you very much.
Q40 Chair: I am sure you understand that when Jesse asked you, “Where is the substance to forward guidance?” some might describe that as a trick question, because there is not any, some might say. I am sure you are aware of that possible line of thought, given that it was changed almost immediately after it was started.
You will maintain several positions while an MPC member. I have a list here. I will not read them all out, but there is quite a few. None of them seem to be in the UK. How often are you going to be in the UK?
Professor Forbes: I was hoping to be here more or less fulltime and move my family over this summer. The logistics of having a spouse in a job that cannot transfer immediately and three children who are already signed for schools in the US and getting them into private schools here have proved too much of a challenge for me, so our plan is our whole family will move over here permanently starting next summer and then we will be here permanently based in the UK for those two years. For the first year, I will be here part-time and be weekends in Boston. I will be here at least the three days a week that are in the contract and realistically much more, based on what I have heard are the commitments at the MPC.
Q41 Chair: When you are here, how will you earn a living?
Professor Forbes: Tomorrow and Friday I will start looking for apartments in the UK.
Q42 Chair: No, not where will you live, but how will you earn a living?
Professor Forbes: Oh. I am paid by the Bank of England, so that will be my primary income. My primary affiliation is with the Bank of England. I will spend the majority of my working time here. I will also keep some affiliation with the MIT. I think it would be very useful to still have that leg in the academic world. I still do on occasions some executive teaching for them on weekends or for one week in January, so some very limited teaching, but MIT has been fantastic and left it open with me. I am going to first dedicate myself fulltime to the Bank of England this fall, and then depending on—once I have got up to speed—how much time I have, I may do some part-time teaching or part-time affiliation with MIT.
Q43 Jesse Norman: Just to clarify that my question to you about forward guidance was not intended to be a trick question of any kind. I am far from clear that it has any substance, and I was asking in a general way of whether you thought it did either, so it is important to dispel that imputation.
Chair: Sorry, I was not imputing that. I just would have found it a trick question if I had been asked.
Q44 Mark Garnier: Thank you. Professor Forbes, can I just pick up on a couple of points that Mr Norman and Mr Baker have made, and this is about inflation targeting. Why 2%?
Professor Forbes: That is a question I have asked at the Bank of England. I am not sure—
Q45 Mark Garnier: What did they say?
Professor Forbes: They said that years ago when this debate was occurring, there were some academic papers that suggested that around that range was an appropriate level; very vague.
Q46 Mark Garnier: This was not meant to be a trick question either, but you will see the point. The reality of it is that it was decided when this whole thing was set up in 1999, I think, when it came in, and since then we have seen the colossal asset bubble generated, the colossal boom and bubble leading up to the financial crisis. Then we have come out of that and we have had another situation where we have seen inflation running well above the target, but of course we have explained it away due to energy prices going too high and the lag effect of that working through. Yet we are still stuck with 2% and it strikes me as being extraordinary that we are still sticking with just this notional number that goes back, what, 15 years, I think it is, and we have so many lessons on why it is wrong and yet we are still sticking with it. Discuss.
Professor Forbes: The short answer is—which I know is not what you are looking for—that is the mandate from the Government and we stick to the mandate by the Government. Why did the Government set that mandate might be the question.
Q47 Mark Garnier: Why does this Government stick with the previous Government’s mandate?
Professor Forbes: Yes. The discussion that many experienced central bankers, or the argument they make is that any time you change that, you are risking unmooring inflation expectations. Right now, central banks have been very successful at keeping inflation expectations contained, so even when oil prices spike or currency moves and inflation moves briefly, people still expect inflation to stay at that level and inflation does not take off. Any time you change that target, you are risking changing expectations and then people might expect it to be higher and higher and it will be very hard to get that credibility back. So there really is a substantively transitional issue if you do even want to talk about changing that target.
Q48 Mark Garnier: But it is also quite an interesting point when you look at when you are doing nominal GDP targeting, because what you just said gives me every—and look, I am a layman, I understand economics, but I am no economist—reason why you should not be using inflation as a target and you should use nominal GDP, because you have a much broader measure that you can use in order to try to achieve more different things out of it, and when you have a runaway economy but low inflation for lots of different reasons, you have the problems that you can deal with on the Monetary Policy Committee, but your hands are tied very firmly behind your back and you cannot do anything about it, so nominal GDP targeting just gives you the greater flexibility.
Professor Forbes: You see, you do sound like an economist. From the policy work I have done, there is often a trade-off, where economists can come up with something that in theory might make more sense. Yes, maybe nominal GDP targeting could in certain circumstances make more sense, but it does lose something in terms of being more complicated. Having an inflation target is something simple that the average person, the average man on the street, my grandmother can understand. There is a huge benefit to having policy targets, simple frameworks that you can explain to the public, especially for an unelected group like the MPC.
Q49 Mark Garnier: Yes, okay. Can I turn to households? I spend quite a lot of time worrying about the effect of the recovery on households. The first thing is I think you said in your submission that, “Increased consumer spending, however, has recently been financed primarily by lower savings rather than growing incomes” and this is in referral to the people and the economy. Just how worried are you about the fact that the UK economy seems to be very, very broadly dependent on consumption and household consumption in particular?
Professor Forbes: I am not worried yet, but I am hoping that this trend will change. It is natural after a recovery, savings popped up during the crisis, as it should have, given the hit that so many people take. Now savings is falling, people are spending more. Much of that spending has come initially out of the fact that they are wealthier, they have paid down some of their debt, so this initial fall in savings—the savings rate is now down to about 5%, 5.5%—I think it is not a worry yet, but much of this consumer spending is just being financed by less savings, not by stronger earnings in income.
To see this recovery be sustainable, you want to see a transition where consumer spending holds up—that has to be a key leg of the recovery—but you want to see it supported by income growth, and of course income growth comes from two things. One is having jobs and that is where the economy is doing well, the job creation has been remarkably strong, and I think the last data is about 500,000 jobs in the last six months. That is phenomenal job creation, but we have not seen wages recover yet, and so that is the last leg we would really like to see recover, you would like to see wages go up, combined with more people having jobs, then real incomes will go up and then that could support strong consumer spending, not just running down your savings.
Q50 Mark Garnier: Do you see that happening though?
Professor Forbes: We have seen the employment side turn. We have not seen the wage side turn. The wage growth has been surprisingly low. I think that is another piece of data we are obviously going to be following very closely.
Q51 Mark Garnier: Do you trust the data?
Professor Forbes: I do not trust any data too much.
Q52 Mark Garnier: There is a reason I ask, because we have this great debate about the productivity gap and all the rest of it, and we are trying to work out what goes on in the economy. Of course the ONS is looking at data, which is pretty vanilla data, how many people are in jobs and how many people are putting in tax returns and so on, but we have a very different economy from when this data collection was set up. We have huge amounts of people who make quite a lot of money, for example, trading on eBay and that kind of stuff, so there is wealth that is being created in very, very invisible areas. This is why I kind of worry about the data, because the productivity gap is causing people a lot of angst in terms of trying to work out what is happening. What do you think is happening in terms of not necessarily the productivity gap, but in terms of what is happening to households and where they are finding their money from? Do most households have multiple income streams like trading on eBay or doing a little bit of internet selling or activity or whatever as well as having traditional jobs where the ONS only picks up half of the story?
Professor Forbes: Like you, I worry about data a lot. Productivity data is always one of the hardest and there is a good chance that the productivity data will look a little bit stronger once we get the data in September, but I doubt that is going to erase all of these mysteries in the UK data right now.
In terms of whether there are other income streams, so we might not be capturing earnings, I think there are some very interesting patterns, the fact so many of the new jobs created in the UK are self-employed, we do not know quite what that is, if we are catching all that, so maybe there is something there. I do not think I would be quite ready to jump to, “There must be something unusual or illicit, not reported, going on” yet because enough of these patterns could just still be a result of this very serious, very prolonged recession. It could be workers have seen such a difficulty holding on to a job and getting a job, they are not comfortable yet pushing for wage increases. It may be that since investment was slow to turn around in the UK that it takes time for more investment to lead to more productivity growth and higher wages. I think we are in the realm of this could still be a normal work-out for a very prolonged, very deep recession and we do not have to jump to other illicit things going on, but the verdict is out. We do not know. We will need more data to know if we can explain it through normal channels or if there is something else going on.
Q53 Mark Garnier: Household debt: are you worried about the level of household debt we have in this country?
Professor Forbes: The level of household debt is high. It is something again to watch. The level of debt does not worry me as much as just are people going to be ready for changes that happen in the economy, so that is what exactly is that debt, who holds the debt?
Q54 Mark Garnier: Can you expand on that particular part?
Professor Forbes: If much of the debt is, for example, mortgage debt linked to variable interest rates, then that is something you have to watch very closely. If the debt is more stable debt with fixed interest rates, it is less of a concern. There was a very interesting study that the Boston Fed did a few years ago, where they looked at who got into trouble in mortgage debt and who could not finance their house any more, who had to be foreclosed on. The initial assumption had been of course it was all these people who had variable rate debt, and once rates go up, you could not finance this large level of debt, and those are the people who immediately had to foreclose and could not service their mortgage. But what the Boston Fed found was that the biggest number of mortgage defaults initially were not because of higher rates or variable rates, it was people who lost their jobs, and so I think that was a really key point. It makes sense, but just to remind us all: if the economy is strong and people keep working and you keep the macroeconomics stable, that will go a long way in helping people be able to handle any adjustments in interest rates, even if they have high debt levels.
Q55 Mark Garnier: There are a couple of things I want to discuss in this, because broadly speaking, when we look at this, we are looking at kind of the major bulk of that standard deviation cap, but clearly the problem area is going to be the tail end of it, where you have those households that are already kind of slightly stretched and they do have sort of one or two crises that affect their households. When interest rates go up, that is going to affect them. As a member of the MPC, how conscious are you going to be of the effect on those people at the end? The reason I ask is because I have noticed a change of tone certainly from the Governor. When I first asked him this question when he first arrived he said, “We cannot possibly do monetary policy based on the extremes of the standard deviation cap”. That was the correct technical answer, but certainly not the humanitarian answer. More recently, his tone has very much changed, where we talk about the baby steps and move a little bit and then have a look and see what is happening, and if it is okay, we can move a little bit with interest rates. How much humanity do you have when you are increasing interest rates on looking at those people who are going to be affected by this most directly?
Professor Forbes: I think that is something we are obviously going to watch, we have to think about, but we also cannot set interest rate policy based on a small portion of the population. The way the system should hopefully work is that the FPC is watching this just as closely, and if there start to be risks to people who are over-indebted or people who cannot handle an increase in interest rates, the FPC should be targeting that group, helping reduce those vulnerabilities in advance so that then when it is time for the MPC to start to adjust interest rates, there is less vulnerability in that sector, so that is the goal.
Chair: One last quick question.
Q56 Mark Garnier: I just wanted to ask another one based on a question that Mr Norman asked.
Chair: It will have to be quick and a quick reply.
Mark Garnier: These are really interesting answers, Chairman.
Chair: Maybe, maybe.
Mark Garnier: Mr Norman was asking about interest rate spreads charged by banks, potentially the interest rates would go up, the interest rate spread could widen or it could contract, so we talk about kind of the direct effect on household incomes. I am particularly interested in what is happening within banks, so at the moment there is a big debate about the amount of forbearance going on by banks in terms of households and businesses. At the moment, banks are funding forbearance at 50 basis points. If we see a 25 basis point hike in the base rate, that funding rate is going to go up by 50% for the banks on forbearance, and that is quite a significant increased cost for those banks. How do you think the banks are going to react to forbearance when suddenly they see a marked and very, very significant increase in their cost of forbearance?
Professor Forbes: I do not know how banks will react, but I think big picture, from a macroeconomic viewpoint, one of the concerns has been that there has been such a high level of forbearance that has in turn hurt the efficient allocation of capital and that has made it harder for some deserving, productive firms to get access to loan and capital. Now that we are starting to see the financial system recover, it seems that it might be time to start to see the willingness to tolerate forbearance start to decline and start to see the banking system work the way it should, which is less forbearance and instead lending to the most productive, highest rate of return companies. I do not know the details of this issue, but I think big picture this is not all bad. There could be benefits to reducing the amount of forbearance going forward.
Mark Garnier: The Chairman is giving me his eye.
Q57 Mr Love: Can I come back to the productivity puzzle? The Bank of England put out a press statement yesterday, I think it was, and as part of the headline it said it is at a loss to understand why you have touched upon the issue. I think the important one here is that normally when there is a recovery, there is a recovery in productivity, and you are saying we are waiting for the data, but we are waiting for Godot, we will be waiting for the data for some time. What do you think? You are bringing fresh thinking to the Monetary Policy Committee. What do you think is going on here?
Professor Forbes: I wish I could give you a short and simple answer, but it is a very hard topic. I have read what the Bank of England has done, what the IMF has done, what a number of different groups have done to try to understand this and looked at the data myself. My sense is there is no one magic reason why productivity growth has been low and that is why it is so hard to get at. I think there has been some data issues as growth is restated and it is likely to be slightly higher, productivity growth will not look as dismal as it has looked. I think—
Q58 Mr Love: How do you respond to the suggestion that our employment rate—
Professor Forbes: Yes, labour hoarding.
Mr Love: Labour hoarding, how do you respond to that?
Professor Forbes: Yes, yes. I think in the initial stages of the recession, there probably was some labour hoarding, especially in the 2000s, before 2008 there were periods it was hard to get good workers, so then when the crisis hit, companies are reluctant to let go of their good workers. They did not know how long it would last, so there probably was some labour hoarding going on then and that would have slowed productivity growth. There also has been a structural shift in the UK, where there has been less production in exports, manufacturing, more of a shift to services, which tends to be lower productivity. There has also been the shift in the labour market, where you have more and more people who are self-employed, which tends to be a lower productivity sector. That is not necessarily a bad thing if people want to work part-time and not work as hard, and that is a choice, but we do not fully understand that yet.
Then there is this issue of the reallocation of capital in the banking system. There was some evidence that the banking system was not lending efficiently, there was too much forbearance, there was not enough money to fund productive new enterprises, but that is starting to recover. I feel like fairly soon we should have a much better grasp on what is holding back productivity, because many of the factors we have been blaming for holding it back are not going to be excuses any more. I think we will start to see productivity recover, and if it does not, then there is a real puzzle and we are going to have start looking even deeper than we have.
Q59 Mr Love: What steps should we be taking? People say we should do more to sponsor business investment, we should do more to get the banks to get their balance sheets in order so that they can lend more efficiently. What other steps could we take to improve the prospect of productivity coming back again?
Professor Forbes: I think a lot of the steps are in place. The financial system you talked about, so I will not talk about that any more, but that is key. Another is anything to support investment. Stronger investment generally leads to higher productivity growth with a lag, and investment was very slow coming back, that is just recovering, so anything to make sure that that investment continues is going to be key, and that things like—as much as you can—reducing uncertainty, anything to show a strong economy will support investment, that is key.
Some other steps to think about, which is outside the realm of the MPC, but as a Government to think about is things to support small and medium enterprises. That is the sector that traditionally is the slowest to recover after a recession. We have seen that in the UK, small and medium enterprises are still struggling. Because small and medium enterprises are often very important engines of job creation and productivity and growth, so some way to support that sector could also be helpful, in addition to the financial sector.
Q60 Mr Love: You are reflecting a debate that is ongoing and has been for some time.
Can I shift entirely? In your written evidence, one of the risks or challenges that you suggested was increased current account deficit, which has risen sharply to over 5%. You suggested that that might be explained by temporary factors. What do you think is going on here and are there any worries out there for us in terms of the balance?
Professor Forbes: This is similar to the question on savings. Not a worry yet, but I am going to be watching it very closely, and if it continues to deteriorate, then it is going to be a worry. The current account deficit, as you said, it is about 5.5% of GDP roughly. I spent a lot of time working on this for the US, and the current account deficit in the US reached about 6% of GDP, and the rough rule of thumb in the 2000s was when current account deficits hit about 5% of GDP, that is when you really need to start watching. It is unusual to have a current account deficit of that size unwind gradually and slowly without some disruption, so red flags should be up. But usually when current account deficits of that size unwind, it is because they reflect a loss of competitiveness. It reflects the exchange rate becoming overvalued, exports are no longer competitive and the country is importing a lot, usually purely a consumption boom and not able to export at all. Those are the ones that unwind badly.
The UK, the good news is the current account deficit is not caused by those factors, even though the exchange rate has appreciated by, as of today, 13% versus its low of March of last year, it depreciated by 25% before that, so the UK does not yet have a competitiveness problem. Most of the deterioration in the current account deficit is not from a loss of trade competitiveness. The trade component is fairly small and most of it is this investment income line, as you said.
The data is not good: that is one of my frustrations with UK data, this data on capital flows and current account balances and international investment positions. It is very hard to sort out, but the best I can tell is a lot of that deterioration was losses of investments for direct investment in the eurozone, which was natural, given everything that has been happening in the eurozone. Now that the eurozone is starting to stabilise, we should start to see that loss of investment income close and the current account deficit should close. That is a lot of ifs, but that is exactly the type of thing we need to be following and should be following closely.
Q61 Mr Love: I will skip the question I was going to ask you, because you have touched upon something that certainly worries me, and that is what is the importance of the exchange rate in all this? You talked earlier in answer to a previous question about international capital flow and London’s attractiveness. How much influence can we have over the exchange rate with that sort of massive movement inward and outward in our economy?
Professor Forbes: Any economist who has spent any time in academic institutions will say we cannot predict the exchange rates, we cannot do anything about them. They are incredibly hard to try to move when you try, so I think that is generally the policy I will follow, there is very little you can do about exchange rates, but you do need to think through the effects as the exchange rate moves and they do have very powerful effects on an economy.
Q62 Mr Love: Let me press you just a little bit. One of the so-called advantages of QE was that it was meant to act on the exchange rate. That is one way of easing monetary policy, it would be one way.
Professor Forbes: Yes.
Mr Love: But I take your point about how difficult it is to affect it, but you mentioned earlier that you felt that Britain was competitive. I think many people would say even with the depreciation we had following the credit crunch, that did not make us competitive internationally, and if you look at our traded goods sector, we massively import. It is only through the capital account that we manage to square the circle. Is there any hope that we can do anything in relation to the exchange rate?
Professor Forbes: I think you hit on exactly the right point. Even when the exchange rate depreciated substantially during the crisis, 25% depreciation, and as you said, that did not give you a huge cost advantage, so I think exactly clarifies that competitiveness is so much more than just the exchange rate, it is things like having flexible labour markets, a good tax policy, a good place for businesses to invest. That tends to be much more important than just the exchange rate. The exchange rate is one factor certainly, but all the other stuff often matters much more, so I think that is something directly, if you are worried about competitiveness, to focus on.
Q63 Mr Love: A final question: if I can just ask you, in the eurozone area, they have fixed the exchange rates between the countries of the eurozone. We think it is to our great credit that we are not members of the euro, simply because it gives us the flexibility of the exchange rate depreciation. The reality is we need that flexibility because we need to depreciate our currency, otherwise we then are faced with the situation faced by many other eurozone countries of finding other ways to make themselves more competitive, which are exceedingly difficult.
Professor Forbes: I do a whole class, as you might imagine, on exchange rates and your fixed versus flexible, why one, why the other, and they both have such strong costs and benefits. If you have a fixed exchange rate, that can stabilise prices; if you are worried about high inflation in some countries, that can reduce inflationary pressures. A flexible exchange rate, on the other hand, is very good for adjusting to shocks. I could go on and on, for an hour and a half I could talk about it, but I am quite sure Chairman Tyrie does not want me to do that, but the bottom line is every exchange rate arrangement has costs and benefits and some of it comes down to the political weights that the country puts on the different costs and benefits to decide what is best for that country.
Q64 Mr Ruffley: Professor Forbes, good afternoon. In answer to question 11 on the major risks confronting the UK economy, you talk about the markets being very sanguine, and surprisingly so, in your judgment, and you say many assets that were previously seen as risky, such as bonds of periphery euro area countries or equities in major emerging markets, have seen unusually strong recoveries and are being priced at levels that do not seem to incorporate the risks inherent. What can the MPC do about that and what are you going to do about that? Is it exhortation, is it giving speeches? Where do you fit in?
Professor Forbes: One data point to confirm that is still an issue versus when I wrote this, I just checked this morning and the cost for the UK to borrow and for Spain to borrow was exactly the same at 2.79, so Spain is now borrowing at exactly the same risk spread as the UK. That for me suggests that there is a bit of people—
Mr Ruffley: Yes, mispricing going on.
Professor Forbes: Yes, something is not quite right. Some investors are too sanguine to think Spain is the same riskiness as the UK, so I stand by those comments. I am still worried, the—
Q65 Mr Ruffley: I was not challenging the proposition, I was merely asking you what you thought you could do about it.
Professor Forbes: I think what you need to do about it is remind investors that there is going to be a change in interest rates at some point in the future, that this period of very low rates that have meant borrowing is basically free will end at some point and people need to be prepared. That should hopefully help, so that at least when this volatility does increase from this unnaturally low level, people will be ready and prepared. I think the bully pulpit talking about this, talking about the future, talking about changes is probably the best that we can do.
Q66 Mr Ruffley: What is the potential rate of economic growth in the UK?
Professor Forbes: That is another excellent question. It hinges on what productivity growth is and right now we do not know what productivity growth will be.
Q67 Mr Ruffley: But ballpark? I think most members of the MPC would have a ballpark figure in their head. What is your ballpark figure in your head?
Professor Forbes: My ballpark is roughly 2%, 2.5% of GDP. We are growing at 3.1% of GDP now, which is probably a bit above, but we still have the output gap to close, so I am really afraid to narrow it down though. I think we just have too much uncertainty.
Q68 Mr Ruffley: Fine. I know you are seeking membership of the MPC, but you clearly have to have advertence in your work to the FPC and you know that shadow banking is becoming increasingly topical. You probably saw extensive coverage in the London edition of The FT about shadow banking. What do you think are the best ways of getting non-bank lenders to constrain their activity? We know how traditional bank lenders are required to hold greater capital and in particular reserves in central banks. How do you think that should be done in respect of non-bank lenders to make them safer?
Professor Forbes: Yes. I think this is obviously something the FPC has to be thinking about.
Q69 Mr Ruffley: What do you think?
Professor Forbes: I think that we need to be very careful when we talk about regulating the financial system, be aware it is not just banks. This needs have a broader umbrella. There will have to be different regulations obviously for different institutions, but that is one of the biggest risks: the tighter regulations you put on the standard financial system, the standard banks, it will slip out.
Q70 Mr Ruffley: But let us talk about non-bank lending. How do you make it safer?
Professor Forbes: I think that it really does depend on the institution. I think that is why it is hard for me to generalise. Mutual funds will probably require one set of oversight and rules, life insurance companies may require another set of oversight and rules, so I think it is very hard to generalise, one tool will not affect everything, but the bottom line is all of those will have to be under the umbrella of oversight of the financial system, even if they are not standard straight financial companies.
Q71 Mr Ruffley: A final question, Mr Chairman, because I know we are short of time. Just so I am clear about this, what do you think is the likely path of unwinding £375 billion of QE in this country? Have you an idea about the best way of doing it? Do you think the gilts should expire and not be renewed, as you alluded to before? Is that the way to do it or is there another method?
Professor Forbes: Again, I have not talked to the others about what their plans are—
Mr Ruffley: No, but I want to hear what you think.
Professor Forbes: —but I would recommend first by just letting them naturally expire, and if that occurs with no dislocation, no extreme volatility, then I think you would have to very gradually, with preparation, talk about selling them into the markets. But that would again occur very gradually and it would be a way to naturally adjust, based on what the reaction is.
Chair: Thank you very much for coming to give evidence to us this afternoon, it has been extremely interesting and we look forward to hopefully hearing more from you in the future.
Professor Forbes: Okay, thank you very much.
Oral evidence: Appointment of Professor Kristin Forbes to the Monetary Policy Committee of the Bank of England, HC 206 2