King Comments on Stimulus, BOE Remit: ITV News Interview (Text)Fergal O’Brien
The following is an unedited and unreformatted text of the second part of an ITV News interview with Bank of England Governor Mervyn King. It was transcribed by ITV and distributed by e-mail today.
The first part of the interview was broadcast yesterday. Click here to see a transcript.
Q: Governor, I’m struck by the optimism in your discussions about the economy. What is it that’s changed your tone?
MK: “I don’t think you should exaggerate the degree of optimism. What I see are signs of a recovery and I think there is a case for supporting that through additional asset purchases. One can take different views on it and some of my colleagues do. I do think that during the course of 2013 there are reasons to suppose that we will start to see a recovery.”
You’ve spent most of your career at the bank. Do you have sympathy with those who are calling for a change in the remit of the bank, the job description, the 2% target for inflation?
“I’m not sure that there is any call for a major change in the remit. What‘s most important is that we commit ourselves again to a very clear target for inflation of 2%. Of course what we’ve seen through the financial crisis is there are difficult judgements to be made about the short run tradeoffs between inflation and growth and I think it’s perfectly reasonable to ask questions about how those judgements are made.
The Bank has failed to meet that inflation target for much of the time you’ve been in charge. Is that because the remit is wrong or the policy is wrong?
‘‘Neither. Between 1997 and 2007 inflation was extraordinarily low and stable and we didn’t have to write a letter [to the Chancellor] once in that period. The global turmoil that followed the financial crisis meant that we had some extremely difficult choices to make. Yes, inflation has been above the target. Question is, would it have been right to have raised interest rates to bring inflation back to target sooner? My answer is no because if you believe we should have raised interest rates, the only thing we could have done would be to slow down the economy even more. I don’t know anyone who thinks the British economy has been growing too quickly in the last two or three years and if we had adopted a tighter monetary policy in order to bring inflation back sooner, we would have had an even deeper recession and higher unemployment.”
Would it make more sense for the bank to have a different remit, like the American Central Bank, where you’re asked to look at something else like employment alongside inflation?
“No, I don’t think so. I think the important thing is we explain why it is that we’ve looked through some of these short-run reasons why inflation has been above target. Which has very little to do with the state of the economy. After all look at what is happening to wage increases. Domestically generated inflationary pressures are very weak. Most of the sources of inflation now are coming either from overseas or from the administrative price increases that have resulted for example from student tuition fees and some of the energy price changes. None of these, to my mind, nor to my colleagues either, adds up to a strong case to say why don’t we push the economy back into the ground in order to offset these temporary effects. We’ve looked through them and we said recently we would look through them, but and I stress this, we will bring inflation back to the 2% target in the medium term.”
Inflation expectations are low in historic terms and that’s perhaps one of your biggest achievements at the Bank. Are you worried that achievement might be swept away by what seems to be a growing orthodoxy that growth matters more than inflation?
“I understand why people are concerned about the very weak growth performance of the economy. That’s a very justifiable view. Our task is to make sure we can support the recovery while maintaining stability of inflation expectations. We shall monitor that extremely closely.”
Is that not changing…there are various sounds that that is too rigid a view to take and that growth is what matters…
“I think we all want to see a faster recovery. I want to see a faster recovery. I don’t think you can say the BOE has been rigid. We’ve cut interest rates to zero. We’ve increased our asset purchases to 375billion pounds, we’ve introduced the funding for lending scheme and we’ve tolerated inflation above target. Whatever you call that, it isn’t rigid.”
Children at school today will have no recollection of the very high levels of inflation that we used to have and probably don’t understand why it matters. Could you explain why they should be as worried as you?
“Because when they use money, they want to be fairly confident that the amount of stuff that they can buy with their money will be the same next year or five years down the road as it is this year. They want to have confidence in the value of money. That’s fundamentally important.”
How fragile is it – keeping inflation low? How quickly could it spiral?
“Well if we were to abandon our commitment to bring inflation back to target in the medium term, if people were to believe we had lost our commitment to low inflation then we could lose it rather quickly, but I don’t think that’s the case today. We’re determined to make sure that doesn’t happen. You say children won’t remember inflation of the past, the whole point of having an institution like the Bank of England is that we have an institutional memory that will remember high inflation in the past and make sure that no-one today will be allowed to forget it. We will maintain the approach to low and stable inflation.”
Can you describe what life is like in an era of high inflation? What is that is so scary about it?
“What was scary when we had higher inflation was that businesses faced very high interest rates, people had to focus not on the long-term future of the business but whether they have money to meet the immediate interest payments. People’s mortgage payments doubled in a very short period of time. That put enormous pressure on household finances. People stopped looking to the long-term which is what we need businesses and families to do for our long-term prosperity and the started to focus entirely on the short term and people got into a competitive race of demanding higher wages because they’d seen somebody else getting a wage increase. We’re a long way from that now and we certainly don’t want to go back to it.”
Is there complacency…Do you think people have forgotten?
“I don’t expect people to go around and worry all the time about inflation. That’s our job. Our job will be to make sure we don’t go back to that.”
How did you feel about a report when a report about the bank said junior staff had to temper what they said to senior staff?
“Well we take that seriously so we got the heads of division to go out and ask the junior staff. I don’t think people do that. The BOE is an intellectual environment but its one in which young people know they can say what they really think. We ask the younger people. When we developed the funding for lending scheme, some very junior members of staff played an absolutely key role in designing that scheme.”
Unlike the OBR, you’re not going as far in publishing all the data and assumptions behind your forecast. Why are you keeping some of them secret?
“We’re not keeping them secret. The MPC is a group of nine people and they make collective judgements which they take responsibility for. You cannot expect a group of nine people to agree on or even accept responsibility for a lot of detailed numbers which they’re not really ever involved in. What the Committee does is to form a big judgement about the outlook for the growth of the economy and for inflation and that’s what they form a judgement on collectively and that’s what we publish. I think the idea that just publishing thousands of pages of numbers, you increase accountability, is refuted by examples of transparency everywhere else. What matters is that we’re open and transparent about the big judgements that we make, and held publicly accountable for them and we are.”
People feel that they don’t understand how you get to those judgements and by publishing the assumptions underlining them, you’d help them understand.
“Well that would be very misleading because we don’t reach our judgements by poring over thousands of pages of papers or turning the handle on a computer model and getting the answer out. The judgements the MPC makes are exactly that, they are judgements reached after a discussion among the nine members of the committee and in the end people have to say I feel that the outlook is for a modest recovery this year with downside risks, or a different view. Those are the big judgements. It’s completely false precision to say there is a secret set of numbers or a computer model that’s generating numbers that everyone else should see. That’s not the way people behave. We form big judgements about the outlook and that’s all that matters. Whether it’s 1.7 or 1.6 is neither here nor there. It’s the big judgements that matter and we are very transparent about those.”
What makes you angry?
“Well I don’t think you can afford to be angry in a job like this. I’ve talked to my various private secretaries who I’ve worked with over the years and I think they realise that when you’re in a position like this, what you have to be able to do is reach decisions quickly and you can’t do that by being angry. So even if you feel frustrated at times, and I’m sure anyone in any job feels frustrated from time to time…”
What’s frustrated you?
“Well, various things not least the way in which the financial crisis occurred and the difficulty in responding to it. What’s more important is you don’t get angry, you think your way through the problems. I think what the BOE is there for is as an institution which will continue indefinitely. We have an enormously large number of very talented young people who work for the BOE. The future of the Bank is very bright, the squad is very talented. They will do the same as we do. We think our way through the problems, we keep calm about it then you have to make a decision, stick to it and implement it.”
You’re retiring soon…Are you looking forward to it?
“Yes, I am, I will have been Governor for ten years. That’s long enough for anyone. I’m sure it’s long enough for the Bank too. You need change. I’m looking forward to a different life.”
Beyond spending more time devoted to Aston Villa, what are your plans?
“I’ve many other interests but the first thing I should do is take a gap six months, not quite a gap year maybe but certainly a gap six months. I won’t even think what I’m going to be doing in the future until that’s over.”
Is there anything you regret as you look back?
“So many things are happening today that my job is to focus on the here and now and take the decisions. I won’t even think about regrets until some considerable time from now on. You can come back and ask me then but it certainly isn’t for today. Today is about what’s happening to the British economy today, how can we get a faster recovery and how can we make sure that we will get back to the inflation target in the medium term. That’s what I’m responsible for and that’s what I’m working on.”
As you look back…what’s your legacy?
“I spent half my career at the bank, the first half was as an academic. The legacy at the bank that I will feel most proud of are the group of very talented young people who remain at the bank. The most extraordinary set of bright young people I have ever worked with. I feel proud of having brought them into the bank, promoted them in the bank and I shall very sorry to leave them but very confident that the bank is in safe hands when I’m gone.”