Transcript: Interview with Sir John Gieve
Sir John Gieve, the Bank of England’s deputy governor for financial stability, talked to Chris Giles and Scheherazade Daneshkhu on September 22 .
Q: How are you finding the monthly process of Monetary Policy Committee meetings and how is it going alongside your role in financial stability?
A: Fascinating and I’m very impressed, actually. I worked in the Treasury for many years, so I’ve been engaged in interest rate decisions before. Coming to the process now, it is a quantum leap more thorough, considered, and informed than anything I remember in the previous regime and I’ve been very impressed by the quality of the discussion. And anyway I enjoy it - it’s fascinating.
Q: What sort of input did you have in interest rate decisions when you were at the Treasury?
A: Mainly when I was working in the Chancellor’s office and when I was working on public expenditure and budget issues - I was head of the budget directorate for a while. In those days of course monetary policy and fiscal policy were being decided in the same place, and I was involved as an adviser, not as leading the monetary analysis. I don’t want to disparage the monetary analysis that was being done by my colleagues and in the Bank at that time, I’m sure it was high quality, but the nature of the decision-making discussion and the thoroughness of it has been hugely improved under the new system.
Q: There are some suggestions that since the Bank hasn’t changed interest rates outside a quarterly inflation report meeting for quite some time now, that there are too many meetings and actually the only important meetings are the inflation report meetings.
A: I think that it’s difficult to argue that 12 meetings are essential and that 10 or eight would be disastrous, but equally I can’t see any compelling reason for change myself. I think it’s a natural cycle. Obviously from one point of view, having August off or January off has some attractions but, as you would have observed, August seems to be one of the months when things have tended to change, so that rather argues against change.
On the issue about whether we only seriously consider moving rates in forecast months, that certainly isn’t true. I think it’s natural where you’ve got an area of uncertainty you tend to have a fuller analysis of that area in the forecast months, so I don’t think it’s chance that we have moved more often in forecast months. But I think it would be a bad error to think that that was now set in stone and we might never move outside that. Certainly the discussion is a serious one in the other months too.
Q: Do you find since you’ve got a very important role here at the Bank on financial stability, that going to various meetings for the MPC and having to look at the minutes, etc, get in the way of doing your other role in the Bank?
A: No I’m enjoying them. Of course I’m relatively new, whether I would think the same after 15 years I’m not sure, but right at the moment I think they’re good value and they’re a very important part of my job. Yes I do lead the financial stability side of the Bank, but you know membership of the MPC is not an incidental feature of the job - it’s very important. So yes I think there is an element of repetition and for some of the staff, there may be an element of grind in this. We’re looking at the moment at streamlining the processes, to minimise the mechanics but from my point of view, as a relatively new member of the MPC, this is all good value.
Q: Moving on to the August decision to raise rates, was it an easy decision for you to vote in favour of an increase? Just two weeks before the decision you’d given a speech suggesting there were no wage pressures from rising oil prices and oil having little impact on inflation generally.
A: Firstly, I didn’t think I was changing my mind between my speech and my vote, and I think often in these cases the commentators try to dig an angle out and find a dove or a hawk. So I don’t think it was a dovish speech, though a couple of people tried to give it that spin.
I thought it was a pretty clear decision in August. Two things came together.
On the one side - the demand pressure side - when I arrived at the beginning of the year, there was real doubt about whether the recovery from the 2005 dip was solid. We had a number of months in which consumption and retail sales didn’t show any clear pattern. So the question at the beginning of the year was, is the recovery going to become well established? Progressively through the summer the doubts were allayed - the revision of the national accounts was a factor in that. Growth had been running a little above trend and it seemed broad-based, with growth in manufacturing, in the services sector and it was pretty well-established across consumption and investment. Of course you can never tell from the trade figures but our markets are growing and we’ve seen some recent figures suggesting these are good times for exporters. So the doubts at the start of the year were allayed and there was a strong case for moving in terms of responding to demand pressures and stopping those over-shooting.
And the second consideration was that there was a signalling case for pushing interest rates up then, because inflation, was around 2.5 per cent and just about as high as its been at any time since the Bank got independence. The prospect of it rising further, at a quite critical time in the traditional wage round and with some worries about expectations, meant it was important, I thought, to signal the fact that we were determined to bring inflation back to target. So those two things came together and I thought it was a clear-cut decision. And on the whole everything that’s happened since I think has confirmed that.
Q: One of the reasons given in the minutes of the August meeting for the rate rise – and you’ve just mentioned it there - was the revision of the national accounts which made the committee as a whole feel there was less likely to be a large degree of slack in the economy. We all know this is very hard to measure but what’s your view on this?
A: I think it was a factor and the minutes said so. It wasn’t the main factor for me, in the sense I was more impressed by the solidity of the growth figures, growth in GDP, money GDP, consumption and investment, which has been encouraging. Yes it is very difficult to measure capacity, if you divide it roughly into spare capacity in firms and the labour pool, all the indications are that firms are running pretty close to capacity, so the first half of that seems to me, not much sign of spare capacity. On the labour market side, unemployment has been rising, and so that does point to spare capacity. I must say I think one of the areas I want to do more thinking about is the labour market and the impact particularly of immigration because we’ve had this unusual period in which participation has been rising, employment has been rising and unemployment has been rising. And on the workforce side that’s partly immigration but it’s also older workers returning or staying at work longer. That’s quite unusual because often participation responds to the availability of jobs. And so I think – I’m not the first person to say this, I realise – but I think something big is happening in the labour market and I’m not quite clear how much spare capacity we’re pointing to, but clearly some.
Q: Do you have a sense when you talk about either increased participation through older people working or through immigration, the clear tension on the committee seems to be, we don’t know how much this is a demand versus supply side phenomenon?
A: It is interesting, coming from the Home Office, that immigration is such an important factor in analysing the economy and I think it is. You’ve seen the [September] minutes include two or three paragraphs on that in particular and I think that economists here and outside are still trying to bottom this out. Traditionally what happens with immigration is that in the early years immigrants add a bit more to supply than to demand: they tend to be savers, they tend to send remittances home and so on. Over time, that tends to wear off as they get married, they have children, on the whole the immigrant population begins to look more like the host population and therefore the demand and the supply side balance out. What we’ve seen over the recent past has been a rapid growth, as far as we can tell, in inward migration and I think a good part of that is relatively new and probably is saving.
Q: Is the Bank now talking to the Home Office about these issues? Are you using your experience from the Home Office to inform the MPC?
A: Of course I’m drawing on what I know from the Home Office and everywhere else on the MPC. Yes, our economists are talking to the ONS statisticians, the government actuaries department which deals with population projections, and I think, also to the Home Office. This is an area though, where the figures aren’t great. There are quite good measures of people who apply to come, but there are much worse measures of who leaves and actually a lot of this has to be based not on the official statistics, but on talking to companies, unions, workers, and getting a sense of what’s happening on the ground. And I think – this was before I came – this is an area in which the Bank’s network of agents have been very important in influencing the MPC because it became apparent to them through their contacts that something quite big was happening before the official statistics confirmed that.
Q: Is there a structured way you’re thinking about looking at the issue of immigration and the economy?
A: Yes, as you know there’s a research programme in the Bank on different aspects of the macro-economy and one strand of that is definitely on the labour market including immigration. In fact we had a seminar just in the summer with outside academic experts and people from Whitehall who have studied the labour market to talk this through and there are people here doing this pretty much as a full-time job.
Q: Was it your impression that the Bank might have had a better idea of what was happening on immigration than the Home Office?
A: I wouldn’t say that. No, of course not. This is one aspect of the labour market and the supply side of the economy that the Bank’s looking at but there are about 20,000 people in the Home Office who are thinking about immigration as their full time job.
Q: The most recent minutes talked about the August rate change reducing the degree of monetary accommodation. Do you think interest rates are still accommodative?
A: Well, I’ve obviously discussed and looked at the literature on what is the neutral or natural rate and the answer is, it’s very difficult to tell. I’ve looked at various estimates and they range from between 4.5 and 5.5 per cent, so you could say 4.5 was definitely in the bottom range and I think at that point, yes it was on the accommodative side. Quite when we reach the tipping point you can’t be sure, this isn’t an observable fact. So I think we probably are in a range where trying to calculate the natural rate isn’t going to help very much.
Q: One of the concerns about the medium-term outlook, which was a new piece of thinking at the Bank in the August inflation report, was that if oil prices were to stop rising and the direct inflation impact of higher energy prices were to moderate, then you would expect companies and individuals to push up margins and wages. How much weight did you put on that and are you now expecting to see oil prices falling quite rapidly?
A: I saw your piece in today’s paper saying that falling prices could lead to a rise in inflation, which was a slightly pleasing paradox. First, just on the margins point, this is a key judgment about how far price-setters will be able to re-establish their margins and how quickly they’ll do it, and certainly one influence on my thinking has been anecdotal evidence coming through the Agents’ network. We all go out on regional visits and the feeling you get from those, and from the surveys, is that maybe price-setters are thinking there’s more room to widen their margins and pass on their cost increases now. So that is a factor.
On the oil side, you’re absolutely right, as your article implies, that a reduction in the oil price or a reduction in the gas price has two effects. It has a big impact on headline inflation, which is good and, in a sense, it creates a bit more room for other prices and margins. Secondly, it has some demand effects and we need to assess the balance of those and no doubt that’s what we’ll do.
Q: By the September meeting, oil prices already had started to fall by about 15 per cent. Was that not seen as a permanent change at that point?
A: No, I think it was seen as a significant factor, but the truth is we don’t know whether it’s a permanent change. If you look at the futures market, it was saying if anything that prices might rise, rather than fall from that lower level. So we discussed it, we noted it was already feeding into petrol prices, that’s a very rapid pass through and that would have an impact on headline inflation. On the other hand, the prospect remains pretty uncertain. There’s obviously a lot of geopolitical uncertainty underlying this, and I think that a big factor over the last few years, has been the growth in the world economy, not just in the west, even more in the east. We’ve just been at the September [International Monetary Fund/World Bank] meetings [in Singapore] and on the whole, what I saw were people marking up their growth forecasts for this year and next. That in the end will feed through into the level of oil prices and other commodity prices. We certainly noted that if [oil prices] went on down that could be very significant, but at the moment we’re watching the scene.
Q: One of the things I certainly noted in Singapore was that a lot of current and former central bankers were really quite worried about inflation. Was that your feeling of the global outlook and how does that then feed into your thinking about the UK?
A: My reading was that growth this year has exceeded some people’s expectations. I’d been to Frankfurt just on the way to Singapore and the European Central Bank has been marking up its growth forecast quite significantly, the IMF forecast looks good and the thing that really struck me about Singapore was the optimism and confidence in the private sector. So the central forecast, if you like, is of continued growth and with that naturally goes worry about what that would mean for inflation. Against that of course, there was a good deal of talk about what’s happening in the US economy and the housing slowdown there and whether that will that feed through into a more rapid deceleration of growth. That is probably one of the main uncertainties and the IMF noted that quite prominently in their presentation. So far, there’s no great sign in the figures for the US that the turndown is going to be a sharp and severe one, but that’s one of the things I’ll be watching quite closely in the next few months.
Q: Do you think China was making quite a strong case in Singapore that people shouldn’t expect it to be exporting deflation any more? We’ve seen very rapid rises, particularly in the coastal regions, in wages and also in export prices. Do you get the sense that we should be more worried about import prices?
A: I was thinking about this last month. First, the data confirmed the case for the increase we made in August. Secondly, the issue was should we move again and I think there were three elements - areas of uncertainty - which I personally will be focusing on in the next few months.
One is the US prospect, which I think is critical to the overall world growth picture and I think we’ll get more sense of what’s happening in the housing market in the next couple of months, about how rapid that slowdown is about whether prices have topped out or not, and are they going to go down.
Secondly, I think import prices are a big issue. In our own consumer price index, goods inflation has risen quite sharply, having been very low and negative at some points in the last few years. So that is a concern - are we coming to the end of the period where globalisation and the development of south- east Asia have been holding down goods prices?
Thirdly, the labour market at home, how’s that developing and how’s that going to feed through. Obviously, inflation expectations, are part of that. So in answer to your point about China, yes, I think it may well be that we’re coming to the end of quite a long period where goods prices were being driven down by globalisation and the absorption of China and India.
Q: The September minutes referred to the second release of the second-quarter gross domestic product figures in that month, and that nominal GDP had risen very sharply to a 6 per cent annual rate. This had been sitting around 5 per cent for years, so how important is it to you when you suddenly see nominal GDP moving outside that very stable range?
A: Like everything on the MPC, it’s more important to some people than others. For myself, I’m not sure how much extra information we were getting from the nominal figures compared to the real figures. In a common sense world, you’d expect us to be able to measure nominal GDP directly and then we’d use deflators to get back to real GDP. That isn’t actually how the ONS do it. In some sectors of the economy they can measure the nominal numbers but in quite a lot they have better measures of real GDP and then they measure the deflator and get their nominal estimates by multiplying the two. Experience suggests that of all these numbers, the GDP deflators are the ones which are most prone to revision and are least certain. And certainly something funny was going on with the import deflator last time round. So I didn’t put much weight on that particular figure or the fact that it had reached 6 per cent. I put more weight on the fact that this has been rising – the trend is well established. I wouldn’t put too much weight on the actual number, whether it’s 6 or 5.5. So that’s my view.
Q: And how much weight do you give to house prices in your interest rate decisions?
A: You know the orthodox answer to this, and just to rehearse that first, we’re trying to target consumer prices not asset prices, so basically the question is what are the asset prices telling you about demand pressures in the economy? There’s absolutely no doubt that the housing market is a big factor in the behaviour of the wider economy. Now the Bank’s staff have done some research which suggests that the relationship between housing prices and consumption is perhaps a little bit weaker than is used to be. But, nonetheless, I think it’s significant and if house prices were rising in double digits that would certainly raise some questions. Rather like the way the money supply figures are raising questions. There’s no necessary read across and it’s very difficult to assess how far the build up of liquidity in financial institutions may or may not feed through to the rest of the economy. But that is a warning light at the moment.
On house prices – I saw Kate [Barker – external MPC member] saying she was a bit surprised that they were still growing faster than earnings, and I can understand what she was saying, but I think house prices at the moment in Britain are something we’re watching but they’re not at the top of the warning list because they’ve come down over the previous years from an unsustainable rate. I have to say, when I go to international meetings, generally people are asking about the US - can they achieve the soft landing on the housing market that we achieved here? Now at some point you might say it was too soft here - is it turning up again? We’ll watch that, but it’s not the top of the worry list at the moment.
Q: And we don’t for sure do we that it is a soft landing for the UK housing market - we don’t know which direction it could go in the future?
A: No, but the moment at which people most worried about falling house prices and negative equity and so on, was obviously around 18 months ago when they were coming down very rapidly and in fact they didn’t fall - they stopped around the 2-3 per cent level and they’ve edged up a bit since. So it’s a factor.
Q: In terms of your list of warning lights, you talked about the monetary figures, could you construct a list at the moment where the lights are flashing for you?
A: Well that’s one [monetary expansion] and I think it is undoubtedly uncomfortable to see the growth rates and it’s not giving us the answers but it’s certainly setting some questions.
Clearly the state of the world economy that feeds through into demand for our exports looks extremely strong at the moment, that’s one factor. And investment – I’m going to be talking about this next week – in many ways it would be highly desirable for the increased investment we’ve seen over the last two quarters to be established to get a better balance in growth. But of course investment is a call on resources and so, if you like, in demand pressures. I’m looking at that. We’re anticipating and expecting in the central projection, consumption growth to ease back a bit around the end of the year and I’ll be watching to see whether that looks likely or not.
I’ve picked out a few points but the truth is you have to look at a very wide range of indicators, not least because each indicator can be quite misleading on its own at any one time, so I don’t have a list of sort of two or three things flashing away -you have to look at a wide range.
Q: Moving to your role in financial stability, there was a little bit of turmoil in the May-June period but many markets have essentially gone back to the pre-turmoil period which can be described at historically very high. Does this give you a cause for concern?
A: We published our financial stability report the other month and there are some causes of concern although they’re worries about tail events really rather than about the most likely outcome. But yes, naturally I bring to the MPC a concern about the financial sector and what’s happening there. And I agree with you, in July in the Financial Stability Review, we identified as one of the main risks that the pressure to maintain your market share and your market position, the risk of losing market share, was too dominant over the assessment of financial risks and there was a risk that the markets would over-run. We said at the time it wasn’t quite clear whether May-June had changed underlying attitudes or not. Well, coming back from the meetings I’ve been at over the last month, I’d say it has become clearer that it hasn’t changed and we’re back in a mood of quite aggressive risk-taking in financial markets.
Q: You’ve been consensual to date, you’ve only been at eight meetings, but can you see yourself sticking your neck out and what sort of issues do you think that would be over?
A: In the MPC there only ever is one issue, which is, do you want to change the rates or not. But yes, I can quite well imagine being in a minority. I think one aspect of the commentary on the MPC is a bit misleading, it slightly gives the impression that what you’d expect to see is a 9-0 vote followed by an 8-1, 7-2, 6-3, then getting even and then finally someone tips over and the majority comes up. That underlay some of the commentary on the August decision because suddenly we’d been 7-0 and then we moved the other way, but actually on the committee at any one time there’s quite a spread of views. A 9-0 vote not to change could be people who are all quite close to shifting their votes or it could show that there was a heavy weight of people who weren’t expecting it to change. Anyway, I’ve already considered and got quite close to voting at one point in the minority but what I’m trying to do – and this is something that Mervyn [King – Bank governor] emphasises and leads the committee to do - is to really focus on the numbers and come up to their best judgment.
Q: You said you came quite close to making a change, voting in the minority and I presume that was in the earlier meetings - do you think there is a bigger hurdle you have to cross before you decide to vote for a change, than to vote for no change?
A: In principle, no. And oddly enough I’ve talked about this - is there a danger of getting stuck in a rut with the barriers to movement getting ever higher? I don’t think that does happen although I think it’s something to watch out for.
A different way of putting this is, how certain do you have to be before you take action on your view? In some circumstances, where there’s an urgent need for action you can’t wait, you’ve got to make the change today. There may be circumstances like that. In other circumstances, you can think we’ll probably need to move rates over the next period but it doesn’t matter too much whether they move today or tomorrow, and so it’s worth waiting to see and to get a little bit more certain. For my part that was the position I was in, in the summer, before August. I was thinking rates will probably need to go up soonish but I don’t think it’s critical today and there remains some doubts and I think I’m going to get some more information - it was that sort of process.
Q: Are you in that sort of position now?
A: As you know, we try not to forecast our own votes. I think the position now is quite interesting because the commentators seem pretty convinced that rates will go up again and that they’ll go up in November. I can understand why you take that view because you’ve observed we tend to move often in Inflation Report months. Our last forecast in August had a central projection, which got us back right to target on the basis of a further rise of rates. So that all makes perfect sense, but of course, life doesn’t follow the central projection generally. And I still think there are some issues and uncertainties - and I’ve mentioned them - about whether the economy is going to unfold on that path. So make of that what you will.
Q: I asked before whether there were certain issues you were more concerned about than others on the MPC. I was thinking about your predecessor, [Sir Andrew Large] for whom the build up in the rate of growth of household debt carried more weight than for others and, in the past, there have been other MPC members for whom the growth of asset prices and house prices has carried more weight. Are there particular issues that carry more weight for you or is it the three issues you outlined earlier?
A: The three areas I outlined were things I was thinking about at the moment and I think they are particular conjunctural points. I think it’s true that if you are on the financial side of the Bank, as I am, and on the [board of the] Financial Services Authority, that it’s natural for me to be thinking a lot about what’s going on in the financial sector. I bring that perspective, if you like, to the committee, perhaps more than other people. And, of course, that is about asset prices, it is about build up of debt, it is about leverage and looking for signs of over-heating, for example, and that’s what Andrew did. So that, if you like, is where I’m starting from but I’m not the “asset price man”; I’m trying to take an overall view and I think it’s very important that everyone does that – I’m sure Andrew did that too.
Q: On the financial stability side, are you happy with the way the Bank works with the FSA and in general with the powers that the Bank has? Would you think there are changes that need to be made there, coming in afresh?
A: First of all, I think relations with the FSA are good and miles better than they were when I was last concerned in this area. I used to be chair of the tripartite standing committee briefly when I was in the Treasury, and at that time, I think it would be true to say there were still quite a lot of transitional tensions on what the roles were. That has been very much past history and I think we have a very good relationship with the FSA now and the revised memorandum of understanding that we issued earlier in the year does clarify things. I think there’s absolutely no lingering wish in the Bank to get into the regulation of firms or anything of that sort. On the other hand, the Bank really has something to contribute in terms of systemic analysis and also we are a participant in the markets - not just an observer or a regulator - so we have not only a huge engine of economic analysis and economists looking all the time at the balance in different markets but we also have market participation and trading relationships. So we can bring those two things to the party. I think that the new Financial Stability Review was a quite important step forward in trying to focus our contribution to send clearer messages - not just to survey the scene but say what risks you, market participants and you, other members of the tripartite group and overseas authorities should be focusing on. I find this an absolutely fascinating area and at a time when the financial sector is changing its structure very rapidly and I don’t feel at all there’s not enough space or that we’re trampling on each other’s toes.
Q: I’ve got to ask you finally about your time in the Home Office, about the release of foreign prisoners without facing deportation, for which you’ve apologised, and the 2004-5 Home Office accounts. Do you think your credibility has been damaged and can you understand why people might ask the question: “Why should we entrust the country’s financial stability and interest rates in your hands?”
A: I don’t want to go over the particular issues because to go over the issues because I’ve given my evidence to select committees, I’ve said my piece and explained what happened. Of course I know, more possibly than anyone, how much still needs to be done in the Home Office to bring it to where it should be. I was pushing forward some major reform programmes and, on the whole, those are still going ahead under the new management and they’re very necessary and there’s a lot of further improvements to be made. But what I also know is that over the four years that I was there, the Home Office made real progress in all its businesses. If you look at the reduction of crime, bringing more people to justice, tackling the drugs issue, tackling anti-social behaviour, and getting on top of the flood of asylum applicants which threatened to overwhelm the department at the turn of the century and is now under control, these are real achievements. So I hope people will look at the picture as a whole, and I believe that I can play a useful role here drawing on that and obviously drawing on my 20 years at the Treasury and previous experience in economic policy making.
Q: Is there anything from those years, any sort of management lessons that’s made you come to re-think how to do this job?
A: I’m learning lessons all the time and some of the things I’ve done at the Home Office are directly relevant. I had to chair the Whitehall emergency committee after the 7th July bombings, so I’ve been engaged in contingency planning and crisis management - I’m hoping nothing like that is going to happen in the Bank, but of course I take lots of lessons from that. The problem of the accounts was a problem of project management and the transition between two systems which went wrong, there are certainly lessons from that. But I’m really enjoying the new job and the new challenge. The fact that it is very, very different is one of the reasons I’m enjoying it so much.
Q: How does the simulation crisis you do here compare with the real crisis like the 7th July - do they feel real?
A: Firstly the games, the simulated exercises are absolutely essential and they do help you prepare for the real thing. I learnt that in the Home Office and I think it’s just as true here. So, for example, the big exercise we are going to launch with the FSA on the market-wide exercise around Avian flu over a period of weeks, will be really valuable in getting us, as well as the commercial institutions, to get the choreography right, to get our lists in order, who does what, what questions should you ask - it’s really invaluable. Is it like the real thing? Well, up to a point. Of course the real thing always raises new questions and pressures and the thing it raises above all, is time pressure. The most difficult thing in a simulated exercise is to get that right. The pressure you’re under to say something to people like you – not people like you but your colleagues on the other desks and to the media and so on, those pressures are very, very great and immediate and it’s quite difficult to get that right in a simulation but it’s still very valuable.