Refinitiv Newscasts - Bank of England Governor Andrew Bailey appears before House of Lords committee 1

Credit Suisse AG

13/06/2023 19:21

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Source: Reuters

Description: Bank of England Governor Andrew Bailey appears before the House
of Lords Economic Affairs Committee as part of an inquiry into central bank
independence.
Short Link: https://refini.tv/42D0Aa8

Video Transcript:

>> Well, the points I would make start with this. I do read, and I've read
some of the other hearings in the review you're doing, that talk about the
bank's got a model and the model isn't doing well. I'm afraid it's not like
that at all, we don't have a single model. We have introduced suite models
that we can put to work or actually develop new ones as time goes by. And this
is where the challenge comes in, and this is why I think the Stockton Review
was helpful. I wasn't on the committee at the time, but I do remember it
happening. The job of the committee is to challenge those judgments and to
introduce their own judgments, to form those into changes to the forecast that
seem appropriate given the economic situation we're in. This idea is a sausage
machine that you stick things in at the end and a forecast pops out, it's
really not like that at all. Just to illustrate that there are two things that
I would point to in the current situation is that the committee is making very
big, and has been for some time now, adjustments within what we tend to call
the model, or the central forecast to the persistence of inflation. Those are
judgments really. Secondly, we've got the biggest ever upside, what we called
upside skew. So in our fan chart, the distribution for inflation is at the
highest ever in terms of the upside risk, and that's again a judgment to the
committee. >> I'm going to bring in Lord King because we might be voting
shortly. >> Mr. Governor welcome. And you've been a participant and an
observer in the whole process of setting monetary policy during the 25 years,
26 years now, of independence and indeed, right back to the inflation target
introduction in 1992. And you've been able to observe some parts of it and
actually played a role in parts of it as well. Given all that experience, what
would you say needs to be improved? Are there things that you think need to be
adjusted or improved in the framework? >> Well, I do think we've moved into an
era where we've had very big supply shocks operating on the economy and on
inflation. I think those call into question is what is the right response to
that at the time? What we will need to review is did we look at that broadly
enough at the time. I think for me the biggest challenge in there is the labor
market in 2021. I think although Ukraine sadly is possibly having the biggest
effect on headline inflation, I'm afraid I do take the view that really I've
read some of the books. I mean it was only in December '21, even the
intelligence were saying, this is looking much more serious than previous
Russian troop build-ups. So I would say, I don't think really on Ukraine,
monetary policy is going to solve that problem, we have to deal with it. I
think on the labor market the real challenge and this is the difficult one,
this is an issue we spent a lot of time on in 2021, was the furlough scheme,
which was extended from April til September, ended at the end of September
2021. Right up to the last day though, I think there were a million or so jobs
on the furlough scheme actually more than I think certainly people expected
there to be. And the question for us was, what's going to happen when the
furlough ends? What's going to be the consequence of that scheme ending? Are
we going to see slack in the labor market in the sense that there are people
who are not going to have jobs to come back to? That was frankly, as I
remember at the time, the judgment of most commentators, we were probably at
the lower end, but we thought unemployment would rise. We were wrong, frankly.
>> That's about economic judgment. >> Yeah. >> But those can happen at any
time. What about the actual framework, the inflation target itself? One of the
areas that some witnesses have raised with us, and indeed if you remember, it
was raised right back actually when the independence started, was that the
government gives the bank the inflation target. It doesn't give it any
explicit instructions about the horizon over which to bring inflation back to
target. You can't bring it back immediately because it's a 12-month measure.
You'd have to be oscillating between deeper sessions and booms. So is bound to
take time to come back. The question is, at present, the committee makes a
judgment as to the appropriate horizon which it knows nothing about. Is there
any role for government to have a say in that or are there any other aspects
of the actual framework itself that you would like to be able to adjust? >>
Well, the 2013 amendments to the framework did give us more flexibility over
this point you make about how quickly to bring inflation back to target, cast
it in the context of a trade-off. So it did create more flexibility and it's
something that we do, particularly in the current context. Do spend quite a
lot of time focusing on how quickly to bring it back to target, accepting all
the uncertainty around the judgments we have to make in that. I think we have
the framework to do that. I think there's a challenge in their government what
I've just said, between how much you explain your judgment about how rapidly
you think is sensible for it to come back, and frankly, very well the
uncertainty around those judgments, which is substantial, frankly. I think the
fact that we've probably got more flexibility now as a result of the 2013
changes. I think is helpful. I've got slightly different views on some parts
of the 2013 amendments, but I think that one probably usefully formalize
something that you'd know better than I would that was in the minds of people
before. >> Moving on from that, are a couple of things that follow on. One was
there were changes to the procedures about transcripts of me. If you remember
right at the very beginning when the bank was independent, people try to make
a transcript of the proceedings. >> It didn't go well. >> Because it wasn't a
series of formal statements around the room. It was a genuinely interactive
conversation and the transcribers listened to the recordings, couldn't work
out who was speaking. Do you think that the idea of transcripts, which is now
embedded into the process, makes a lot of sense? >> Well, the first ones will
appear next year in France. >> Appears next year. >> Yes, I think so. >> It's
a five-year lag or an eight-year lag? >> It's eight. >> Eight-year lag. >> I
hope I'm not wrong. If I'm wrong I'll correct you, but I think it's eight.
It's slightly different to the Federal Reserve. The whole of the FRMC is
transcribed. The whole meeting from end to end is transcribed. We have a
series of meetings, some of which are taped and transcribed, and one or two of
which are not early on in the process. We have what's called a briefing
meeting. It's still called the Pre Mpc meeting. That hasn't changed at all,
that's not transcribed because the staff are in a sense downloading to us
what's happened since we last met. Then we have what we called an issues
meeting, that's not transcribed and we do deliberate quite freely on the
issues, but we don't reach conclusions on policy. And then we go into the next
meeting is taped. When we give our indicative views, each of us gives an
indicative view. And then there's a final meeting, which is actually quite
short, where we confirm or not those indicative views, and then we go into the
minute's creation. I think it's important to have that mix because my
judgment, I wasn't on the committee, but obviously, before the transcription
process came into being. So I'm having to judge this slightly from afar on
that. But I think it does have an effect on deliberation. It's important that
we have the opportunity to deliberate without that because I think the essence
of the MPC is that nine people deliberate on the evidence as they see it, and
each of us reaches a judgment on that informed by listening and talking and
deliberating with the others. If I felt that the deliberation had disappeared
at the process, I would be very worried and would want to do something about
it. I think we've managed to preserve that. And I think you can see this in
the FMC if you go back in time that I think it does have an effect. If you're
on tape, you prepare your remarks. There's less give and take I would say. >>
In your first answer, you talked about some of the lessons that might be
learned and what you'd be doing to discover what those lessons are. Why did
inflation go up? What's your theory of inflation? >> What's gone up? >> What's
your theory of inflation? >> Well, I mean this apparent balance of supply and
demand ultimately in the economy. Now, the economy is hit by all shocks, but
ultimately it is the balance of supply and demand. I do take the view, I know
number of people said this, there is a monetary impact, the money impact to
that. So I certainly don't ignore that, and I'd be happy to expand on what I
think we've seen in recent years on that front. But I think the balance of
supply and demand across a number of parts. So it's not just obviously an
activity, it's also in the labor market, it is key to that. Now I think the
challenge we always have though is that measuring those things looking
forwards depends on essentially reaching views on things that are
unmeasurable, in a sense, on gaps. Gapology, the economy. I think we have to
be very cautious about how we interpret that. Ultimately, I think you can boil
it down to a lot and I think you need to do that. I think we have to keep it
as simple as we can ultimately. >> That's a bit more about the monetary side
to it because it's not easy in the monetary policy reports to see much
reference to that. But you said it was still something, that you. >> Well for
example I mean, this is the almost contemporary example I would give and I'm
going to slightly well, both expand and qualify some of the things that I
think you've been said in previous hearings. So again, if we look back to
2021, say I think a number of people have said yes, you saw rapid growth in
the M4 aggregate , what wasn't said? Is that the other aggregate measure of M4
which is M4 lending was not growing rapidly at all. In fact, it was doing the
opposite. This was almost, I think, unprecedented. There was this gap opening
up between the two. Now in the committee, we discussed this a lot and the
rationalization of this we arrived at. But it then posed a question, which I
think is still with us actually, was that we were seeing was quite a strong
build up of saving in the economy. So that helps to explain the gap between
the two measures. I think it was useful the monetary aggregates in a sense,
we're giving us that picture quite starkly. Now, we then had to obviously the
form of view, well we've got this build up of unexpected saving. We can
rationalize it in a COVID context because people were not able to here
[inaudible 00:13:06] >> Sorry, governor, I am going to have to suspend the
sitting for 10 minutes. I'd ask members to be back here at 15:36. Thank you.
>> Just go ahead. >> Suspended. The proceeding is currently suspended. >> The
proceeding is currently suspended. >> We'll now resume our hearing. Sir, you
were in the middle of a nuance. >> Yes. I think I've just said that the
committee was left with an issue in the sense that we had a build up of
unexpected saving. We thought the distribution of that was not even across the
population it was probably more in the sectors of the population who have a
lower marginal propensity to consume out of saving. But we had an issue in
2021 and we still have it to a degree, I'll come to that as to what is going
to be the effect of this build up of the stock of money. I think we see it
now, and I think you do see this, I observe it, this is where most of the
monetary inclined economists fall out amongst themselves. Which is it the
flow, or is it the stock, or is it some combination? Because certainly at the
moment, I mean, the flow, measures of M4 will tell you it's weakening, but we
don't know how much. We never knew exactly how much was out there. We think
the stock is now eroded certainly in real terms it's eroded. But to what
extent that stock still has some overhang is a judgment we have to keep coming
back to. So I hope that helps to explain how certainly I think about it and
how the monetary aggregates do inform that, but it's a little bit, frankly, a
bit more developed in some commentators would suggest. >> It might be helpful
to have some of this discussion and ideas reflected in the monetary policy. >>
That's a fair point. >> Because we looked in vain for references to money and
so on. >> Yes. >> Lending, yes, but I think the way you've described it will
be helpful to see more of that in that. >> I think you'll see it in the
discussion on saving. I don't think you're right, and I think it's a fair
point that they'll link back to the money. Monetary aggregates was probably
not there. >> Earlier on today, you said that obviously you don't use a model
as a sausage machine. It's assumptions in answer out. You told the Treasury
Committee that you've aim off the model, somewhat. >> Yeah. >> One of the
problems with the model is that, if I remember, I can't really think it's
changed, that actually it doesn't really matter what you do inflation in the
medium term always comes back to 2%, and that bit is what you need to aim off
force really. Can you say more about how you aim off? >> So you're absolutely
correct that the problem we have at the moment, and I would say, it's not just
a model, it's models actually, is that they tend to be highly linear and
highly symmetric therefore. So in other words, what goes up comes down more or
less with the same profile. So that's, of course, particularly relevant at the
moment because, again, if you were to leave the sausage machine to run on its
own and just take it as it was, you would find that inflating at the forecast
would deliver a very rapid fall in inflation back to an indeed below target,
well below target. Driven by this linear symmetry condition that is in there,
and we have aimed off that, we don't that's not our central view, it's a long
way off our central view, we think there's more persistence in inflation. And
therefore, we've introduced more persistence into it and we've done that in a
number of ways. I mean, some of the staff have estimated little new models as
it were to try and help us do that, and then a lot of its judgment. We've
said, well this is what we think will happen. How can we then reflect that
back into the forecasts, and then it causes the judgment then on the risk is
entirely judgment, and then really. >> The model basically builds in the view
that inflation is always and everywhere a transitory phenomenon. It always has
to come back to the target and you have to use judgment in order to override
that. >> Yeah. >> And you just say a little bit more about the variables or
the analysis that you use in order to decide where inflation will come back to
or maybe it won't. >> It will because we will have to use monetary policy to
bring it back, frankly. And then the question, of course, is how much frankly?
I would point to two things in the current assessment that I would pick up in
that respect. One is more structural and the other is more a condition of the
time. The structural point really is around the labor market actually, and
what I would say is that, as I'm afraid this morning's numbers illustrated,
we've got a very tight labor market in this country. We've had a fall in the
supply of labor which is showing signs of recovery, but very slowly, frankly.
I would also say, and as you know we've got our network of regional agents who
provide us with a lot of information that informs these judgments. As you did,
I go around with the agents a lot visiting businesses. We've got 12 agents, I
will spend a day with each one of them every year, and one of the things that
firms pretty much universally say to me, and have been saying to me for a
little while is that they find it so hard to recruit labor in the current
market that they are not going to release labor, there's labor hoarding going
on. That they'll adjust hours if they need to, but they will be very reluctant
to make people redundant effectively. We've taken that, and again, we've built
that into the judgment on the labor market and then therefore on the tightness
of the labor market and how that's going to get reflected through into
enterprise setting, wage setting, and inflation. That's one thing we've done,
and we've had to come back to that a number of times, frankly, over time, over
the last year or so. The second one which we spent quite a bit of time on in
the May round forecast is food. And the question which we start with which is
that the world commodity price start of the chain, very heavily affected by
Ukraine. But at the world level, food prices peaked actually last summer. Why
is it taking longer in this era than it has in the past for this effect to
come through, notwithstanding the fact, and again our agents tell us this, and
I hear it. More so by the retailers than the food producers, we've being told
for some time, no, they've reached the peak, rate of inflation is going to
come down. And then the contacts coming back later and saying, well, sorry,
we've got that one wrong. And so we've had to go back and look very hard at
what do we think. We've got some ideas on what the underlying drivers, and we
still think the rate of inflation is going to come down, but it's taking a lot
longer than we expected. Again, we introduced an explicit, that's the sense,
persistence of food and inflation into the forecast in the most recent round.
>> Thank you very much [inaudible 00:30:31] >> Mr. Governor, I've been asked
to ask a question about groupthink. From one perspective, it's very clear
there is not groupthink and that is on the Monetary Policy Committee. People
have different views, they express different views, they vote differently,
that's not groupthink. On the other hand, as has already been touched on,
there is one area where there does seem to be group think, you may say, but
it's a group think within the academic economics profession, which is the
standard macroeconomic model, in the UK it's a model that people are using and
so on, where there is no room for money. And following on from the last
question, as you read the detailed reports of the Monetary Policy Committee,
that does seem to me, and I use strong language here, there seems to be a
willful neglect of handling money, despite the fact of 18th century, 19th
century, 20th century, money has played an important role in many people's
view of inflation. But somehow, money is never mentioned. It's one asset among
many others and there's nothing distinct about it, there's no urgency somehow
about treating money. And it's very interesting that in the MPC between March
2020 when COVID first hit the scene and when interest rates were raised by
0.15%, there was unanimity among the MPC. It's one of the few occasions when
there's been that unanimity. And my question is, on the one hand, you talk
about as you did to the last meeting when you were called to give evidence in
the other place, you talk about the supply side sharks COVID, Ukraine, the
labor market. All of those supply-side sharks are outside of the Bank of
England. But the money supply shark to me is something that's under the
control of the Bank of England, but somehow it's not mentioned, it gets lost
in all these other assets in the system. And I suppose my question is, why is
it that somehow there seems to be, I don't know, almost a fear of using the
word money stock as if you then become a monetarist? Monetarist, mis-Ideology,
which I don't think it is. It's simply a proposition that if you increase
rapidly the stock of money, a broad stock of money, you'll have inflation. But
it's a long question. But that's what I'm struggling with. >> Well, first of
all, I don't subscribe to any view that is ideology. I'm entirely with you on
this. I have to say, honestly, I think it comes back to the response I was
giving to the question Lord King asked. Which is I think the dilemma we had at
that time was between what I call the stock and the flow interpretation. The
flow of the aggregate of money was very rapid because we knew that, in a
sense, we're not obviously blind to that. We were seeing, however, a very
different picture in terms of credit creation in the economy. When you look at
this, I'd be happy to send the charter. And if it would help the committee
with the two measures, looking back over a long period of time, 34, we go over
40 years or more. It is, I think, almost unique to see these two measures of
money move in very different directions. I take Lord King's point that we
could draw this out, but we have to try and interpret that, that's our job. >>
Something we've heard from witnesses, which I think is a very fair point.
There's a difference between being a central banker and an economist working
in a central bank. They are two different things. and therefore, as a central
banker, you must make these tough calls and so on. And all other central banks
in the world had to make the same tough calls. And frankly, you were there in
a huge majority and even others who would have placed a stronger emphasis on
the money stock were saying in mid-2020, of course, it was the right thing to
take the breaks off, otherwise, we could have ended up with a great
depression. But like Lord King, I think if there was some move made in the
monetary policy reports, or at least some recognition in even speeches or even
a paper presented by somebody, that money as opposed to credit, did have a
role. Because money is something you pay with. Credit is something when you
defer payment and you borrow. Credit and money are different things. >> I
don't know, I think if you go back to 2020 and the response that we had to
make in 2020, it's worth remembering the economy, GDP fell by over 20% in the
initial thing. I've noticed some of the other people who've appeared here, I
don't think particularly question the 2020 policy stance. I think I would
agree with them. I think 2021 is the really hard part when it became very hard
to judge what was going on. And I come back to this point about the
distinction between the stock and the float, because one of the things that I
do hear some people saying, and I do dispute this is, well, the economy had a
very strong recovery. Now, I think you have to be very careful about the
context of saying this. Yes, it's true that in the summer of 2020, having
fallen over 20% if you only look at that point in time, there is quite a rapid
recovery, but the Uk economy has actually not recovered rapidly. The level of
GDP is still actually marginally below where it was pre-COVID even today, that
recovery was not strong in that sense. The recovery of demand in the economy
was not strong. And then of course, but we were then hit by these supply
shocks. >> Can I just pick up governor? You've said that the recent inflation
driven by supply-side shocks, given the lessons that you learned over that
period if you could re-run that period with a different monetary policy
incorporating those lessons, is it your judgment that the peak in inflation
could have been significantly lower or the trajectory lower? Well, I always
have to caution because this question comes up quite often in the other house,
that we don't have the benefit of hindsight when we set policy. And I'm very
concerned, historians and such are going to come back and look at it with
hindsight and that's absolutely the right thing to do, but that was not the
luxury that we had. We have to make the decisions at the time based on the
evidence we have. Now, I think that you can, of course, and this is a good
thing to do, you can re-run the real-time evidence and people should do that
and say, well, were they doing the right thing at the time based on what they
knew at the time? And that's fine, I'm happy to do that. But to say, well, if
you'd known a war was going to break out, or if you'd known that the end of
the furlough scheme was going to be different, what would you have done? I
would say this, although I'm cautious because this is modeling again and I'm
very cautious about it. One of the things that obviously, I think we should be
careful of saying is this type of shock, with this terms of trade component to
it, has had a very big effect on national income. If we had known it was
coming and tried to offset it with monetary policy, we would have had to raise
interest rates very substantially in advance of it, and that would have had
its own consequences, frankly. >> I wasn't suggesting hindsight in the sense
of being able to know things that you couldn't have known. But you said you've
learned some lessons from this period. >> Yes. >> I'm just wondering how you
would have applied those lessons to monetary policy. >> Well, I think one of
the lessons that we've got to go back to is the question obviously as to what
the right path of interest rates was. But again, we have to base it on what we
knew at the time. We were genuinely puzzled by the labor market for much of
that period going through 2021, and then after the furlough scheme ended as
well. >> Alternative, and I'm troubled bit by some of the vocabulary that's
used. We have an underlying rate of inflation. Then we talk about a shock and
then the word temporary comes in and sometimes the shock and temporary are
equated. I don't think that's actually helpful. If you throw a small pebble in
a pond, the ripples don't go very far, if you throw a rock in those ripples go
on a long time explosion. That wave thing actually been on for several years,
so the temporary, you can have something that is a shock, but it could have
quite long lasting consequences. And I wonder whether the mentality of
thinking that because it's a shock, you underestimate the fact that its
effects could go on rippling through the economy for some time point. >> I
mean, this is a very good question because again, it goes back to the
situation we had in 2021, in particularly first half of 2021. Where it looked
to us that we obviously could see the global supply chain shock. We could see
shipping costs rising. We could see some commodity prices rising at that
point, we could see disruptions to trade going on at that point. We could see
the shift caused by COVID, from demand for services to demand for goods,
particularly in the US, but somewhat here as well actually, and the question
was how prolonged was that? That was the one thing that we could see at that
time. Bear in mind the war hadn't started, the labor market hadn't really
evolved at that point to what we subsequently saw. How long was that shock
going to go on for? What we now know is that that shock probably peaked
probably a year ago or so. It's now substantially now waned and shipping costs
are now back to where they were pre COVID for instance, China obviously got
through the end COVID much more easily than people feared it or so. If that
had been the only shock that we've had, I think we'd probably be having a
somewhat different conversation. Yes, inflation would have gone up, but it
would probably come down again as well, I think. And monetary policy would
have responded as appropriate. Because I know that the word transient,
temporary transitory, call it, what you like is not the word to use these days
for obvious reasons because we've had this sequence of shocks and you can't
distinguish between them. There's no air gaps between them, so it's now a very
prolonged period of supply shocks. But I think the question of when we were
looking at one shock is still a somewhat different context. >> Can I just use
one second? What you're saying is that the lessons to be learned are not so
much from the period pre Ukraine they're post Ukraine is that right? So you
would stand by the fence that if we hadn't had Ukraine inflation would have
been transitory. >> I think it's actually post. Well, it's actually post when
we could see the effects of the end of the furlough scheme which really given
the lag in the labor market data is really November 2021 onwards. So it's a
little bit before Ukraine but not that much. >> Sure I'm following this. One
of your colleagues or you said in evidence to the Communist committee that
even if you had had all the foresight, inflation, and you've used every
instrument in your toolkit, inflation would have still got to 8%. >> Well, we
would still have had supply shocks because obviously those things would come
from outside. And I'm not sure about the not use 8% certainly. >> Someone did.
>> I think somebody may have done it yes. I know one or two of my colleagues
have done modeling on this, that has the strength of illustrating the story
and the weaknesses. Lord King was saying, and I was responding, it's overly
precise in terms of what would have to be done. But if we've been able to
anticipate that, I mean, we would have obviously then had the decision to talk
about how we would set policy in the COVID era, knowing what was going to
happen next. That would have been a very tough call. >> Yes. Because the
implications in terms of double digit unemployment. I think that again
[inaudible 00:44:30]. >> Just to be clear, the lessons to be learned then are
which period, so is it in the pre or post Ukraine period that you feel we need
to be learning? >> Well, I think it starts a bit before Ukraine because I
think the labor market shock is very important in this respect. And that
starts to emerge not long but somewhat before Ukraine. Griffith. Sorry, Your
Honor. > Yes. Very quickly on this labor market shock. And it seems to me you
put a lot of emphasis on the labor market shock and indeed it was a shock.
It's a supply side shock and it's a very tight labor market. On the other
hand, I think if I put myself in the position of a trade unionist today,
thinking of negotiating prices, I'd ask what is the outlook for inflation
likely to be? You look at the OBRs predictions on the public finances, and you
find that for this year and the next two years, the borrowing requirement is
rising and relative to DDP just comes down in the fifth year. You also see
there's tremendous demand for public spending on defense, the NHS, Social
Security, and so on. You now hear on the paper this morning the headlines. The
Chancellor starts talking about tax cuts. So I look at these and then, I
think, well now if I was in the position, the Governor Bank of England, I
don't want to be accused of creating too much unemployment. So with all of
this, I say to myself it is a tight labor market. But what wage bid am I going
to put in? And my question is you make a very good point in emphasizing
inactivity in the labor market but it also seems to me, given rational
expectations, looking forward, there's a very strong case for when you put in
a wage demand, putting quite a big expectation of future inflation into it,
and I just wonder how you balance this. >> That's a really good point. I would
actually say there's another little dimension to what you've just said, which
is the question, if you are in that position as a wage bargainer. So how you
balance what I call backward looking expectations and forward looking
expectations. And this comes back to this question about how fast is inflation
going to come down and in a sense, what probability do you put on that?
Because of course, if you use backward looking expectations, you're going to
get a high inflation number if you weight it towards recent backward looking
expectations. Now we continue to think headline inflation is going to fall
this year and so it's arithmetic. Because of the annual base effects of energy
prices given energy prices are much lower, we still continue to believe that
food inflation is going to come down. But it would be really, rather better to
actually see it happen. So the question if you weight more towards forward
looking at expectations for headline inflation, you would have a lower
profile. Now you can obviously imagine, which I would prefer people to use.
But the question, we have to make the judgment, what do we think people are
going to do in terms of waiting? By the way, I mean obviously the monetary
policy framework and the anchor of the inflation target is also critically
important here. Because we want it to be very clear that we're going to bring
inflation back to 2%. >> Thank you very much principle. >> Given the
complexity of some of the issues that you've been talking about, some of the
things that you have to grapple with, do you think that the remit of the bank
has become overly complex? And how do you manage the tradeoffs between primary
and secondary? Because we've certainly seen from a lot of our witnesses, I
believe, they argue that climate change is not a central bank goal. What do
you think of that? >> Well, it's very good question. There really are three
remits? There's a remit for each of the policy committees. Monetary policy
committee, policy committee, the macro prudential committee, and then the
Prudential regulation committee. And they all have different remits And
they're all different in structure. It's useful to just lay them out briefly.
The simplest is the Monetary Policy remit, because it goes right back to 1997.
>> It's a single objective, primary objective of obviously price stability and
everything else is what I called hierarchical because it has this language and
it's subject to that. I think you are a treasury minister, so we owe you a
great thanks for this and locking as well, that's critical because it is
actually pretty straightforward. The subject is that government can tell us
what its policies are, but actually it's hierarchical. There's no question
that the primary objective is price stability. The other two committees are
not in a simpler position. Now they're a bit different. The financial policy
committee, the macro credential committee. Actually let me go to the
Credential Regulation Committee. It's easy to come back to the financial
policy. The Prudential Regulation Committee has obviously the primary
objectives, safety and soundness, policyholder protection for insurers. But
then it has secondary objectives. It also has what's called have regards to
things that we must have regard to. Currently, I think there are about 31 have
regards. This will come down a bit when some of the new legislation comes
through, but it's only going to come down to about 25, I think, something like
that. So each time we make policy, we have to assess 25, 30 have regards, and
we have to do that as policymakers, we can't avoid that. In fact, there was a
judicial review recently on the Stonehenge underpass which the government lost
because they had not taken into account properly at the policymaking stage to
have regards. The FPC is in the middle and it's actually got a bit of both.
It's got the most complicated because it's got some of the monetary policy
committee in the sense that the government can tell us what its policies are.
Actually it can go further than that in terms of the way the FPC works because
it's not a simply hierarchical and it's also got have regards as well. The FPC
is the most complicated. Now, this is where something like climate change
comes in. It's not really an issue in monetary policy, I think you can think
about how the economy is going to evolve in the future and what the climate is
going to do to it. But it's not an issue in current policy setting. In the FPC
and the PLC, it is because firms are holding assets long term, which can be at
risk from climate transition. My overarching philosophy here is that we must
always, in a sense, view the objectives through the lens of the primary
objective. When we have regard to other things, it should be through the lens
of the primary objective. I'm sorry, if I say this, I'm probably going to come
across as being slightly angular in saying this. I have to say all these
objectives come from government. If you don't mind me saying this house added
an amendment last week on nature to our objectives which is proposed to be
embedded into the climate objective. Which again is an example of how things
not for the [inaudible 00:52:17] for the others. >> Do you think that
politicians are outsourcing too much to the bank. >> Well, I think we have to
be clear that these other things have to be viewed through the primary
objectives. For me, what we do on climate change. Climate change is a risk,
clearly in the financial stability and the prudential world, but we must view
it through that lens. Bank of England is not there to make climate change
policy. That's other people's job, not ours. >> Can I quickly just jump in if
I may, some have argued that you should go further on climate change. >> In
which direction. >> Other in the sense of actually being more activists, more
interventionists. Where do you stand? >> I stand very clearly that I think we
must be focused on our primary objectives and everything else we have to view
through the lens of the primary objectives. Climate change is a risk of
financial stability. We clearly have to take account of that very clearly. But
it's in that context, not if you don't mind me saying how can we help the
world adjust to climate change, that's other people's objectives. >> It
supports dialogue. Do you have with government in relation to all these remits
coming together? >> We do, when we get the remit letters, we do have a
dialogue with government. I have a dialogue with the chancellor, we have a
dialogue with the treasury. They're not subject to Parliamentary scrutiny, I
think. They're outside that process, I think. But no, we do have a dialogue. I
can tell you actually a couple of years ago, I think there was a proposal on
nature a couple of years ago actually, we did say to the government and it was
adjusted. Look, we've got a reasonable body of thinking on the relationship
between financial stability and climate. I'm afraid on nature, there isn't a
foundation to build that on. >> Do you have a dialogue with, for example, the
Chancellor before he signs the letter of remit? >> Yes, we do, yes. >> Do you
make these points? >> Yes, we do often make these points. It's important that
we, in a sense, we've got to stay focused on our primary objectives. Now, I
think a number of witnesses have said to you, the length of the remits has got
remits, monetary policy is a bit different. That's not change that much but
the length of the remits has gotten longer. Yes. >> Would you like the
government to prune the remit and second, as I was referring to earlier, if
you look at the ECB in particular, it is now saying that biodiversity should
also become a major focus for its activities. Would you agree on that? For
example, Frank Elson at ECB said last week, this is core economics tackling
biodiversity loss. Well, it may be core economics or not, so we could have
that debate. It's not for me, core to our primary objectives, the Central
Bank. What I think you'll find that the Central Bank, there's a bit of a range
of views on this, amongst Central Banks as to how far that goes. Very clear
that we must stay anchored in our primary objectives. But I understand that
ministers recently say to us, but of course you must understand how you pursue
your primary objectives can affect other things. Competitiveness is a good
example here. It has made me nervous. My view is look as much as possible. I
think we should anchor competitiveness in this is in regulation. Obviously in
international standards, in things like the Basel standards. Because those are
global, that I understand fully. I'm not in a sense, died in the dictionary
sense on this. But we have to put these into the context of our primary
objectives. >> I'm sorry to press you on this, but is the addition of all
these have regards, etc, a distraction then? >> Well, it certainly creates
more work. If you take the PRC, the prudential regulation with its 31 to be 25
have regards. Again as I said, the staff have to spend time on this and we as
policymakers have to spend time otherwise, going back to the Stonehenge thing,
you find that you can actually, you'd be taking the course and lose your
policy as a result, so it does take time. >> Does that time spent doing that
distract you though, from other things is what you're saying? >> It makes the
policy making it more complicated. I'll certainly say that. I want to say, I'm
not saying we should just have a primary objective, everybody should just
ignore everything else. The course, there are other things that we have to
take into consideration more. It's much more of an issue for financial
stability. It's not an issue in my view really. So much for monetary policy.
Very good, Davis. >> Yes. Well, following on from that, the primary
objectives, price and financial stability, how do you think they work
together? Is this something that the bank handles well, I'm sure you'll you
say yes, but is there an inherent conflict there? Is there an issue with
managing both price and financial stability? >> Well, they clearly can
interrelate. I think it's a great strength of our system that we have
different committees, different institutions doing the two things, but then we
do have to make sure they work together. One of my jobs as governor, because I
chair them all, is to make sure the pieces fit together and often monetary
policy and financial stability are compliments. I would say actually they're
always compliments. But sometimes you can get instances and I'll describe the
most recent one where you have to think quite hard about how they fit
together. The most obvious recent cases, the pension LDI case last September,
October. We had to make an intervention for financial stability reasons
because we perceived there was a serious risk of financial stability emanating
out of the guilt market and the LDI pension world. My concern was after quite
a lot of nights spent with a whiteboard, we concluded that we had to buy
gilts. We couldn't do it any other way in that particular context, and that
was, of course, my concern, and quite a few people said this at the time. What
you've just resumed quantitative easing. The challenge there, of course,
that's not what we intended to do or did, was how can we design and make sure
we're operating a system, whereas a central bank, we can operate in support of
both financial stability and monetary policy, and not complicate the two. Just
to describe what happened with the monetary policy committee, we had a meeting
of the monetary policy committee and I put it to the monetary policy
committee, though it clearly and said, the test for you is not whether you, as
the monetary committee want to make this intervention in the guilt market, the
test is a different one. It's do we have because my left brain to my right
brain at the solid point, do we have the tools to operate monetary policy,
notwithstanding the fact that we're having to make an intervention in the
other parts of the landscape, can you still achieve your objective? And what I
put to the monetary committee is that my answer to that is yes. Because if you
want to, you can raise interest rates so you can use it on too, and that was
the conclusion we came to. >> Its always a regular meeting of the monetary
policy committee. You didn't convene one? >> That was a special one because we
were out of cycle at that point. It was a different decision. It wasn't a
decision on interest rates, it was a decision to say, have you got the tools
to do your job. >> That was part of the process. >> Yeah. >> We came to that
conclusion. It was very clear that the financial stability intervention, to
use the words we use, should be temporary and targeted that we should withdraw
it as soon as we could. We sold the guilds quite quickly, actually, those
guilds quite quickly. Interestingly, a number of other central banks have come
up to be said. I'm glad you went first doing that, because it was quite
challenging to work out how to make the parts fit together. >> Thank you, Lord
Black. >> I'd like to ask you about the interaction between fiscal and monthly
policy. You explained earlier your model of inflation comes back to the impact
on aggregate demand. Obviously, both fiscal policy and monthly policy impact
on aggregate demand as the means of acting on the economy. But they have
different impacts on different parts of society. Ideally, you would think one
would want to optimize the mix of fiscal and monetary policy to get the best
result. Ideally, you don't want the Bank of England and the government's
fiscal policy working in opposition where escalating interest rates and fiscal
measures work against each other. So is there that dialogue to maintain a
sensible interaction between fiscal and monetary policy? And assuming there
is, how is that really different from what went on before Bank of England
independence in 1992 onwards, once an inflation target been set, because you
could argue that they're setting the inflation target and the government's
commitment to an inflation target that provided that discipline. And even
though the Bank of England wasn't independent if the governor at the time had
made it clear he disagreed with what the government was planning to do that of
itself would be a major discipline. Ultimately, they could resign. So is that
dialogue happening they could must, and therefore what impact is independence
had? >> Well. Our approach to setting management policy is that we condition
of judgments on what we call announced government policies, which the most
important one is fiscal policy. We always take announced government policy as
the condition. And I just say as a point I think down the Treasury Scte
because when we talk about our forecasts they are always conditional
forecasts. And that's one reason they change because the world, the conditions
change. And fiscal policy is one of the conditions and things like energy
prices or others. So we always condition on what the government's announced
policy is and what the effects of that policy is. And we talked quite a lot to
the OBR about what they think this was the effects of fiscal policy on the
economy are going to be. And I think that's important. What I should say does
not happen is that Chancellor and I do not have conversations which go along
the lines, well, if you do this, I could do that or why don't you do this and
I'll do that. That never happens. We do talk about the economy a lot, as I
think you'd probably expect. We share views on what's going on in the economy,
why we think things are happening in the economy, but they are stepped back
from policy. So we don't have the tradeoff type discussions, and that's, I
think, a crucial part of the system we have. So we don't coordinate in that
sense policy, say we always condition on what we think fiscal policy is going
to be. And I know I think the OBR always conditions in terms of monetary
policy on the market path of interest rates. >> But is that a missed
opportunity. If you're not exploring the tradeoffs between monetary and fiscal
policy? >> I don't think it is. I think it's important. I think the value of
having the independent framework is important. And therefore, in a sense, I
think it overrides anything you feel you could get from those conversations.
Because I think the problem is those conversations quickly undermine the value
of independence and the value of the framework. But it's important to talk
about the economy. When we're trying to work out what's going on in food
prices, I'm very keen talk to the Chancellor and talk to the Government and
say, well, what are you seeing? I'll tell you what we're seeing. >> And one of
our previous witnesses pointed out that since fiscal events are maybe twice a
year and the NPC meets many times a year, ultimately, the Bank of England
therefore has the final word on aggregate demand. Do you think that level of
independence is appropriate? >> Well, I think that's a question for the
Chancellor, really. I mean, the question I suppose is one of if you set fiscal
policy only twice a year, what happens in between? I think that's really one
for the Chancellor not for me. I think we say we have to use a conditioning
assumption and I think this is the most sensible one to use. >> Well, at the
lower band of interest rates this is where potentially there could be
questions raised about the bank's independence and its interaction with
government policy where since you can't use lower interest rates or haven't
been able to use negative interest rates. The impact of using QE and the
impact of raising interest rates on the government borrowing requirement. Are
these issues where it has tested and their rates are rising will test the
bank's independence? >> I think at the lower bound there is a change. And it's
an important change. And it's obviously when you're not at the lower bound, if
let's say the government expands fiscal policy, we then have to decide whether
we offset it and how we offset it if we think that's the appropriate thing to
do within the inflation context. Obviously, let's take it as read that at the
lower bound you're saying, well, monetary policy is in some sense constrained.
Then I think you would obviously naturally, therefore, offset fiscal policy
less because you wouldn't want to offset it in that sense. And indeed, you
would in sense be letting fiscal policy come through more because monetary
policy is constrained. I don't think that affects the basic independence
structure. I think that the independent structure is the same, but fiscal
policy would. And that's why people say fiscal policy is. Yeah, becomes more
of an issue at the lower bound, more of a profile. And that's natural in a
sense, if monetary policy were to be constrained in that sense. >> Okay. Just
before I finish, can I just get back briefly to the earlier point about
rerunning history with the lessons learned? Are you saying because you're
saying effectively the inflation was caused by the supply side chocks, that
those who say you could have reduced the peak of inflation or reduced the
level of inflation through monetarist policy by not having had such easy
quantitative easing or such a long period of loan, how long? >> Well, I don't
take the view that in the contributors to inflation that I was a significant
contributor to it. I think these external shocks have been much more the
contributors, I'm afraid. I think I'll come back to the point that I think if
we want to go back and re run policy, I think we have to consider what are the
consequences of alternative policies given particularly the impact the
external shocks have had on national income in terms of trade. >> In terms of.
You say you base your actions on announced policy. What do you do when the
government itself isn't following its announced policy as it has on road fuel
duties? Set this in Esca 2014 and hasn't put it up and yet you seem to be
forced to assume that against all previous experience, next time they will put
it up. >> Well, I still think that the most transparent and straightforward
thing to do is to take announced fiscal policy as it is, as it were, and to
condition on that. As I said earlier, there is always a debate we have and the
OBR and the Treasury indeed are part of this debate about what is the impact
of fiscal policy measures. [inaudible 01:09:41] fiscal policy. But I do think
it's a condition of independence, if you like, we take what the government
tells us as the policy and you're right, sometimes doesn't turn out. But I
think it's important in the framework that we do that. The forecast is always,
it just come back to point I made earlier on, I think when [inaudible
01:10:06] ask me. It's important to remember that we don't make monetary
policy in a sausage machine in that sense. So there is always judgment on
there. >> To follow one from Lord Turnbull, one example of this is that the
current fiscal framework has the property that as long as you can claim that
you're going to see a fall in the ratio of national debt to national income
five years down the road, then that's fine. But then the next year, instead of
that promise being changed to four years down the road, which it ought to be,
it's still another five years down the road. So what you end up with is
governments who promise fiscal tightening in the future but never get round to
delivering it. Is this a challenge and a problem for the bank? >> Well, I
think that's why it's helpful as we do and in fact, we owe this to you, that
we have this distribution of risks approach towards it and we can build that
up. And by the way, I should describe what I just said, we do not build the
risks up bottom up. We don't say it's a bit of this and a bit of that, it's a
top down view, but we can incorporate a lot of underlying judgments into
there. It is a safety valve in a sense to accommodate quite a lot of things of
which that might be one. >> Thank you. Just before I turn to Lord Virgin, just
want to just check one point then bringing together various answers you've
given. So you say that there isn't one model, there are a number of models and
you don't just treat them like sausage machines. So, coming back to Lord
Blackwell's point about the lessons learned. The lessons learned as yourself
saying are more about the judgments made in that period than about the models.
Yes? >> Yes. >> And so the judgments made by the group of the MPC. >> Yes. >>
And so when you're looking at the judgments made therefore were looking at
what, I'm just trying to tease out a bit more about where you're going to be
looking in response to these lessons. Is it the appointments to the MPC? Is it
about what is it that you're- >> Let me give you one example for me. I
remember getting quite a lot of questions in parliamentary committees when we
were going through the early COVID period about how much scarring to put that
phrase that was going to be on the economy and I think the first of the
questions at that time was how much capacity destruction was COVID going to
cause. I think what we look back from today I think this scarring is more on
participation in the labor force than on companies failing for instance and I
think that's something that we need to go back and look at and say what could
we have seen at the time that might have helped us in that respect? That's a
good question. >> And final question sorry Lord Virgie. But in terms of that
period when a number of people, ourselves included were saying watch out we
don't think that inflation might be transitory. In those internal discussions
was there a significant challenge from individuals in meetings saying this
actually may not be transitory, It may be assistant mindful of, for example,
picking up on some of the reviews the bank itself has done on how that needs
to be out here, say a recommendation, challenge, convention challenge and
avoid group think, mindful of those thoughts that have been put you by
previous reviews? >> That challenge built up as 2021 went on. Indeed I would
say it was part of challenging myself in that respect actually. I remember
making a speech in September 2021 saying, "I think the supply chain shocker it
does have transitory elements," but even by then I was worried about what we
were beginning to see, what were we seeing? We were puzzled by the labor
market at that point. It's interesting. I'm sure there will be many pieces of
work done on that. There's a recent paper which is getting a lot of attention
in the US by Ben Bernanke, Olivia Blanchard which, it's not behavioral in that
it's accounting. And the US actually by the way had of course a very different
pattern of shocks to Europe because the Ukraine effect is nowhere near like it
is in Europe. It still looks like that in 2021 it was more the transitory
things than the more potentially permanent things that we're driving it. But
it'll be interesting to see when that's done for the parts of Europe if it is
what that looks like. >> Thank you. Sorry, Lord Virgie. >> Thank you Jim,
Afternoon Governor. Can we shift to the regulatory framework? >> Yes. >> And
how confident you that the current regulatory framework can identify nascent
systemic risk? You take Silicon Valley Bank of course that's in America but
there are lessons to be learned from that, in hindsight it's pretty obvious
that interest rates going up, there was a pretty obvious systemic risk lurking
around there. Your international protocols and then with Credit Suisse again
those were just pretty much torn up in 24 hours. That's question number 1 and
question number 2, can you give us some commentary on the tension between
monetary policy and systemic risk? Interest rates at 8% might be needed for
inflation but that's going to cause real systemic risk. Could you give us some
commentary on that tension? >> I think one of the great strengths of our
structure is the FPC and the MPC are separate bodies and that's not the case
in most systems actually. Because I think one of the consequences of that is
having the FPC is that it is much more focused on tail risks. Its job to look
at the tails of the distribution. And one of those exactly to your point about
interest rate risk is that we have run stress tests pretty regularly based on
a rates up scenario. So in other words, quite a rapid rise in interest rates
usually into some form of recession to create the stress because you have to
create the stress as it were. And I think the FPC structure has been more
rigorous in that respect in terms of doing it on tempt fate. One of the things
we do do and I think this is important to the causes is, the interesting thing
with Silicon Valley is that in many ways the root of this issue is something
that is almost 101 stuff, It's interest rate risk in banking operations, it's
not trading, it's banking operations. We do have what under the Basel
structure called a pillar 2 regime which is interest rate risk in the banking
books so we require our banks to hold capital against that risk. >> I'm sorry
that differed in the US? >> Yeah, for the regionals I think the US structure
does differ a bit between banks but I think the mid tier banks and the US do
not hold capital against interest rate risk in the banking book. The other
thing I should say is that I think there's a Europe not just the UK that the
accounting regime means that far fewer of the assets are held at historic
value. That's important more of them are market fair value and mark market and
that reduces the interest rate risk exposure. So put those two things
together, the accounting treatment and then once you've done that the risk
testing for interest rate risk I think has put our system in a better place.
Now I think that we get a more robust outcome in that process by having the
two policymaking areas separate but obviously interacting where appropriate. I
think the FPC is very rigorous on that thing. On Credit Suisse the second part
I'll come to a third part in a moment. Silicon Valley was a very fast moving
the failure Credit Suisse wasn't actually in some ways approximately it was
but actually it's had been affirmed that I think it we know it had problems
for some time. I think the critical question now with Credit Suisse in the
aftermath is that is actually about resolution policy. I think there has been
an assertion that the resolution plans that we've developed ever since the
financial crisis for these globally systemic banks, Credit Suisse suggests
they don't work. I have to say two things. Obviously we need to test that
assertion because we can't sweep it under the carpet. I'm skeptical myself for
the evidence yet I don't as a starter think that case has been made but I'm
very clear that we have to test it since it has been asserted, that the
bailing plan structure doesn't work. So that's an important point coming out
of Credit Suisse. The third thing to your opening question about systemic risk
more broadly. So I think what we learned from recent years is rightly, we
spent a large amount of the post financial crisis period focused on the
banking system and we still have to be focused on the banking system as recent
events have shown us. But we're having to spend a lot more time now on the
non-banking world and rightly so because in a way I think one of the
consequences of the financial crisis, and the re-regulation or the regulation
of the banking system following the financial crisis is that there was a shift
in the distribution of intermediation from the banking system to the
non-banking system. Now we shouldn't be surprised at that indeed much of it we
actually want it because we felt there were assets in the banking system that
shouldn't be there in terms of their characteristics. They were not the right
assets in a sense be on the other side of the balance sheet from deposits. But
we have now got more systemic risk in the non-bank world and exactly to your
point and this is both global and national point, we have to do both, is that
the non-bank landscape is very big, it's quite dispersed and we have what I
call the breadth and the debt problem. The breath problem is as big as it is.
The debt problem I'll just illustrate, the LDI incident illustrates this very
nicely. Unfortunately the only thing that's nice. So there were two LDI funds
there what's called segregated funds and pooled funds. The segregated funds
were the big funds 85% of the LDI world was the segregated world. Big pension
fund has segregated as its own LDI funds certain outfits and then we had the
pulled world for the smaller funds, 15% of it. It was the pulled system that
essentially was the problem. Because it's quite a complicated legal entity
structure and those funds were not able to in a sense call down the liquidity
from their many parent funds in the way that the segregated funds work. The
lesson I take from that unfortunately is that we have to get the right
combination of breadth and depth. Because otherwise we're getting bitten by
things that we tend to think well it's obvious you should look at the 85%
surely that's the big part of the system and then it's the 15 that rears its
head. >> [inaudible 01:22:17] go ahead. >> You mentioned resolution schemes
and you said we haven't really tested them fully. I think from my experience
and from looking at the outside at some recent events, politicians seem unable
to resist getting involved in resolution when it occurs through Swiss
authorities certainly decided that it was better to impose losses on creditors
than on shareholders, the reverse of what would normally be the case. And I
know in the UK that could not happen partly because of the actions of the
House of Lords when the resolution legislation went through. But were you at
all concerned when the one bidder for SVB UK managed to get a relaxation of
its ring fencing requirement? >> Well the problem we faced is this. >> To get
a sale of SVB UK to a large bank. There were no other bidders by the way. It
would have fallen through otherwise because, I'm a support of the raise funds
but there's a challenge that gave us. We would have had to split SVB in two
because you couldn't put the liabilities and the assets in the same legal
entity and maintain the ring funds. That's the essence of it. It's not because
it was investment banking, it was start up Corporate banking was their
business. That was a challenge. The resolution would've happened if we tried
to split it into two, that wouldn't have happened. And then we've been faced
with the choice of other instruments, putting it into the insolvency
procedure. I'll come back to that in a moment. Or a bridge bank, but then that
goes onto the liability goes onto the public purse at that point. So that was
the challenge we faced and our judgment. I talked to the Chancellor, I talked
to the Prime Minister about this, and I think it's appropriate in that
situation. That's where I think it's appropriate. We do talk frankly, and we
do have quite open discussions about what to do. I welcome their input
actually. It's a tough decision. I think it was the right thing. But I think
we have to be clear that this is not a horses going three ring fencing, which
is open. Once you put a small hole in, the thing just gets bigger and bigger.
I think it's really important that we don't do that. The other challenge in
this, and this is something that we are thinking very hard about it. This is
actually, interestingly for small banks, not big banks. And you see this in
the US as well by the way is, we at a point where it is acceptable to impose
losses onto uninsured deposits or is the concept of money in terms of
commercial bank money and bank deposits really saying no, you can't do that.
You can in the investment world, which is not much, but you can't. An
interesting piece in the economist, I think the other day, actually last week,
the current one. We have to get to the bottoms question because we don't want
to end up having Credit Suisse aside having tackled too big to fail. But we've
now got a too small to fail issue because of how we manage these resolution
tools and whether you can or cannot end up with uninsured depositors taking
losses. >> You're attracted by a scheme that would limit the size of these
very short run liabilities so that you could provide adequate liquidity to all
the depositors. >> On your pawn broker, I can say two things which go in
different directions. Forgive me, tell me if I misinterpreted it. I think the
basic ratio is actually really very interesting and a good one to look at,
which is, in other words, I take to be some of the high quality liquidity plus
the haircut, the value of the assets that they position at the Central Bank
minus the haircut. Actually, you learn by getting those ratios out I think.
Where I might differ and please feel free to answer back, is that I do think
however, that's it's not really a substitute for capital regulation because
the key in there is then the central bank haircut I think. >> Let's not go
into that. I take it from what you said on resolution. I don't challenge your
decision at all, but you seem to have accepted that in a resolution,
politicians are just going to be involved one way or another if they wish to
be. >> It's not like monetary policy. I don't think we're going to have
independence in that sense because it's obviously a very high profile decision
to take. People were lobbying me over that weekend, if we'd put it into the
insolvency procedure, by which actually, by the way, I don't think they would
have lost money. But the problem is that it would have got tied up, their
working capital of these businesses would have been tied up for too long. That
was the problem. I totally accept this. I was getting, for instance, in the
biotech world, people saying you really are going to set back curing disease.
No pressure then. I say that because we have to take the lessons from this and
think, well, what does it tell us about the regime? I do think that's scenario
where we do need to talk to the government about this and say we've got some
choices here. So the Chancellor I we're talking quite a lot about this. We're
both very interested in the subject and want to get a sensible outcome. >>
Thank you Luther did you have any? >> No am good. Thank you. >> Luther is
quick and Lutam. We're running behind time so am sorry. Lutam? >> Think four
blocks of policy. Monetary stability and financial stability. Prudential
reliability of banks, insurers and financial conduct. After 2010, we split
them, dealt with that in a different way, conduct went into one organization.
The other three have come to you. From your previous answer I suspect you're
not going to say we did it wrong. I think you probably like that and think it
from a banking point of view, it's probably a good idea. From the point of
view of the regulated. They're not so happy with it because they've got two
people that they've got to deal with. Then a different question which is
within the bank. They have these three committees. You go chair them all,
which is probably correct, but you go along with the three supporting nights.
You've got four Deputy Governors, and to each one of them you take three of
them. There's not the same three in each one. There's a very solid let me call
it a caucus of the executive. Now, in the face of that, you're working with
the other three day in out. You then got the externals and they're not full
timers like you. Do they really stand a chance to make their impact when there
is such a solid block of external. More is the same for each of these
committees? >> Well, I think it's part of my job to make sure they can. I
mean, I do take the responsibility to make sure that they can do that. I was
interested. You had Don Con appear before you. Don has absolutely huge respect
for you and he was on the financial policy committee for not that long ago
actually. And we were incredibly lucky to have him on the committee. He made
the point. I'd actually take it further. I was interested. He said that he
felt that his job was to challenge the executive and to put them back on the
right course when they veered off. I can understand Don saying that. I would
say having say work been on the FBC for the whole length of time, he did a lot
more than that. I mean, he was one of the movers and shakers of the policies
we made. I thought in classic Don fashion he understated his contribution
massively. And that's where the externals do. But it's my job and I take this
very seriously to make sure they can do that and to make sure they get all the
information they want. They're briefed when they want to be brief. They can
come into the room and advance arguments. The funny thing is that the
externals of course, have got more time than I've got to do these things
because they've got narrower responsibilities at my job of course and also I
have to see the whole picture and that's important. By the way I should say
the legislation is going through that part of which you were voting on. It is
going to create a fourth committee for financial infrastructure which I am not
chairing. One of the deputy governors is going to do. Free as many as I think
it's sensible for me to do. >> We're going to stick with four Deputy Governor.
How far back in history you have to go when there was just one. >> 1996 I
think. 97. >> That's technically no. >> It was a year later, wasn't it?
Technically, but yeah. >> In 98? >> When King became a [inaudible 01:32:02].
>> You've got that right. >> The responsibilities of the bank in those days
were rather different in a way to how they are now. I think it's essential.
Each of the deputy governors runs quite a large area of the bank. And that's
important. And by the way, of course, there are important parts of the bank
that are not within the statutory policy. We're running parts of the critical
national infrastructure, for instance, in payments in the moment, replacing
it. There are very critical areas that are outside this world as well. >> Can
I just quickly just come back to the FPC. Paul Tucker, when he gave evidence,
he said for the FPC the big thing is to introduce voting in some respects.
Cost of not having votes that we can never really see where the debate is in
that hamper accountability. How would you feel about voting? >> I think the
difference between the NPC and the FPCA basic level is that the FPC has one
objective and it's a target. It's a numerical target and you can vote on it.
The FPC I always say is a bit like these old fashioned signal boxes where
you're pulling all sorts of levers in combination. I don't think that lends
itself to a voting model. I know people say we could vote on the cyclical
capital buffer. I prefer to say I think Don Con made this point, and I will
take this point away as well. That I think the better debate there is that we
make sure that the record and the minutes or the record of the FPC sets out
the different views that are taken within the committee on that. I think
that's a, frankly a better way of doing it. I think the FPC works well on its
current consensus basis, with be my view. >> Thank you very much. Lord Rooker.
>> Afternoon, Governor. Do you believe you're a good communicator? >> Well, I
try hard. Can I tell you it's a good great question. I'll give you the
challenge. I think it's necessary in the world we live in now, particularly
with independent responsibilities for central banks to talk not just to what I
might call sort of expert audiences. Not just to financial markets, but to
talk more broadly, including much more to the public directly. I think we all
have to adjust to that. I have to adjust. I know I have to adjust to that.
We've had some times, I think in the last two years when we haven't got it
right. I respect that. I think it's been very difficult communicating the
issue of the effect on real income that these shocks have had. We are in a
changing world and we have to adapt to that and I recognize that. You've said
you've followed out evidence closely. We've had more than one witness suggest
that central banks talked too much which can cause volatility uncertainty. >>
Is it a case for more constraint? I'm going to say while being more open,
there's a contradiction there, but it's not quite so, because it depends which
audience you're talking to. >> That's a point of subtlety, actually. I have to
say, actually, because I do obviously follow the hearings closely. One of the
witnesses said that we talk more than other central banks. And I'm really not
sure. So I looked up the comparison of the NPC with the Fed Board and the ECB
governing council. And by the way, those are much bigger committees. So I
didn't include the regional Fed members. I didn't include the national Central
Bank governors because I know we talked a lot less on that basis. But
interestingly, if you just look at our NPC and the board of governors and the
governing council of the ECB over the last year, actually, we were slightly,
in terms of speeches made slightly lower than the Fed and a lot lower than
ECB. Interestingly, which was almost twice as much as that. Now I'll tell you
what I do firmly believe is that on matter policy is that I was to say I do
not think it is a good thing and I don't like if people, what I call advertise
their votes in advance of the meeting. Because when we started this session,
it destroys the deliberation. What I do think is our job to do is explain our
votes and explain our decisions after they've been made. And that's the
underlying philosophy that I hold to. >> I'll give three brief questions. In
this sense of what you've just said, have you yourself felt either preparing
to meet us today or during the course of the session, felt any constraint in
anything that you've said in answer to the questions at all? >> I'm sure there
will be people who will pick up things I've said and interpret them. We have
to be very careful how we express things because communication is very
important and quite powerful and quite subtle. But I will say it's important
we say what we think, frankly. >> So a central banker can say, we got this
wrong and explain why, and still maintain credibility as a central banker, is
that a follow up on you? >> We have to be open to the lessons learned. If
we're not, then frankly we're just not going to make good policy is my view.
Unless we're prepared to learn lessons from experience, then we're not going
to make good policy all across the board. >> Finally, I understand your term
is eight years, would it materially make any difference to the way you operate
if it was four years and renewable? >> Well, luckily I don't have to think
about that and I honestly don't spend time thinking about that. I've got
enough frankly to think about without having that thought. >> Just on the
judgment point, when you look back over the last few years, would you identify
moments where you would say, we got x judgment wrong and we're learning the
lessons on that and maybe you'd like to fill in what the x is? >> Well, I said
that earlier, we have strictly 2021, and a number of witnesses here have made
the point. I said to the Treasury Subcommittee, we've got to obviously look
and learn lessons. I think we've got to work out what the lessons are, and
they've got to be based on, say, the decisions we took based on the evidence,
and the best judgment we had at the time. I have to be very robust on this, to
Lord Rockers point. I'm sure if I say, well, we didn't get this right, there
will be lurid headlines. But the point is we have to learn lessons. We have to
be robust enough and able to say, I'll take your point, but we must learn
lessons from the experiences we have. Of course we must. >> Very good. We've
got two sets of questions left. One on the court from Lord King and another
one on CBDCs from me. So just too quick. >> There's one part of the bank that
most people think has never changed since 1694, but you've seen over many
years it has changed a lot as the court of the bank. Have you had any
discussions with the Treasury about further changes or reform? >> It's
interesting. So the court, it has been changed three times actually since the
legislation in '98. It became a unitary board in 2016. It changed in 910,
wasn't it? Your time. Ironically, the court has actually changed probably more
often than anything else in the bank actually. What I would say is, in my
experience, the court has evolved a lot over time. It is now the governing
body of the institution, and it is as near as we can get a corporate board in
that sense. In terms of many of the things it does, if you look at the
finances of the bank, the budget of the bank, the risks, the people. And I
value that. I value the fact that we've got a governing body that spends its
time on that because it's an enormous help to me, frankly. And I think we look
to have people on court who can add value in those areas. For me, the court
has actually evolved a lot, and it's very helpful in that sense. > Can you
change the balance sheet of the bank to deal with a financial problem? Do you
have to go to court to get court agreement? >> Yes. So if we're doing any
major change to the balance sheet, the answer to that would be yes. And that
comes about because court has a responsibility for the risks to the balance
sheet. So the court can take a decision as to whether it accepts or not the
risks to the balance sheet that are involved in any decisions we take. >>
Thank you. >> Thanks very much. The final question for me on CBDCs. I know
full well the decision has not been taken. In fact, were soon going to be
debating this in the financial services markets bill. So I know where the bank
is on this. I know that you're doing a lot of consultation on it, but I like
that, and that's very welcomed. One of the questions I have is, where there to
be a CBDC, what impact do you think that has on operational independence and
your framework for operations in house? I'm very interested in Andrew Hose's
speech on this. I'll just quickly, just read the point. He says, "The CBDCs
could have important implications for the size, composition and risk profile
of our balance sheets, for the monetary policy transformation mechanism and
for monetary control." So that one could add, obviously issues such as
privacy, cybersecurity, all the vineyard. Just very interesting, how are you
when you're looking ahead at this? >> Yeah. I start in a slightly different
place, but it's important to answering your question. The first question that
we need to answer collectively is, will there be a business need and case for
digital money? Not with the central bank or not. By which "retail programmable
money" in the sense that you can take a unit of money and attach programmable
instructions to it on some basis that we don't have today. >> I don't know the
answer to that question, but I think we need to avoid what I call failure of
imagination. My guess is probably yes. Indeed I think in many ways that was
what Facebook we're trying to do a few years ago. Now, if you do answer the
question or you think you might answer the question, then I think you've got
the second question, I think you've got three choices then and you can pick
permutations of these. You can do it through commercial bank money by creating
what sometimes gets called take as deposits, but programmable deposits, you
can do it in non banks. Called stable coins, some of the examples we have
around are neither stable nor coins. But this legislation is going to create
the regulatory structure in the UK for non bank stable coins. The third one is
Central Bank Digital Currency. Now I think we need to look at all three of
those. If you don't mind me saying the commercial banks do have this
discussion regularly, they need to decide whether there is a case for
commercial bank digital money. Because I personally do not think if we do say
that the case is positive for digital money, I don't think it's the outcome we
should look for, that the central banks become the only game in town. Now I
think it's important that we're doing the work we're doing because there may
be a case for having, say, a combination of things. There may be a case for
having to use the economics term both inside and outside money in that world.
I think that's an argument still to be proven. I am very focused on the fact
that if we only have Central Bank Digital Currency, there are very big
questions about it's impact on credit creation and economy and there are very
big questions about how it would behave in a stress because it's about access
to central bank money. But I do think we've got, in a sense step bank first
and say, is it right to plan for a world in which there is digital money? In
which case, what does that imply? I do think because central banks money is
such an important part as Lord Griffiths was saying about central banks, we
need to be knowledgeable in this area. I'm very supportive of the work we're
doing. I'm jury out and I do think the banks need to consider this as well
from the point of view of commercial bank money because that would of course,
help to preserve, broadly the monetary system we have today. >> That it's
quite a cold shower on certain digital pan. It sounds like as you say, the
jury is out in your mind which is quite interesting in terms of the
operational framework for independent of the bank. If you go down the digital
Pan route as Andrew has spelt out and as our report spell that raises a lot of
issues. How do you see this impacts? >> Thank you for quoting Andrew speech
because he's an incredibly thoughtful person on these subjects and on the
bank's balance sheets and it's very lucky to have him as a colleague. He's
right. That of course, in an extreme world, we could end up in a very
different world, where the Central Bank's balance sheet is a much larger
proportion of the monetary system than it is today. Frankly, I do not think
that's the world we should aim to end up in because it brings all issues with
it. But that depends if there is a future in digital currency for what
combination of innovations we have. Thank you for asking a question. I'm very
keen to say, can we try to position the debate in that way? >> Very
interesting. Thank you very much. I don't know if colleagues have got any
other questions. We're almost exactly on time, which is fantastic. >> Thank
you very much, Mr. Baddy. You to come in and for answering all of our
questions. With that, we will end the session. >> Thank you. >> The proceeding
has ended