Wednesday June 24, 04:08 PM
Text of BoE Barker's statement to treasury committee
LONDON, June 24 (Reuters) - Bank of England Monetary Policy Committee member Kate Barker gave evidence to parliament's Treasury Committee on banking regulation and supervision on Wednesday.
Following is the text of her opening
statement.
VOTING RECORD
'The past year has seen a sequence of shocks to the global economy, mainly a result of financial market disruption in many countries. There has also been considerable volatility in commodity prices. During the third quarter of 2008, I voted to keep Bank Rate at 5 percent. My judgement was that, although there were signs of the economy weakening, there were also risks that higher inflation in the short-term could prove costly, if it became embedded in higher inflation expectations.
'With the benefit of hindsight, I consider this did not give enough weight to the downside economic news, although equally concern about an upside risk to inflation was certainly not misplaced. The Brent oil price peaked in July at around $144 per barrel, and CPI (NYSE: CPY - news) inflation peaked in September at 5.2 percent.
'Of course, the August 2008 Inflation Report central projections did anticipate a sharp slowdown in growth and declining CPI inflation through 2009. But the pace of deterioration in the main business surveys during the second and third quarters perhaps warned of a larger downside risk to growth.
'However, arguments about policy last summer look less significant today, as it would then have been very hard to anticipate the intensity of the financial storm that broke after the collapse of Lehmans in September. Even had the MPC (A050540.KQ - news) started to reduce Bank Rate a little earlier, it is unlikely this would have proved to make a significant difference to the scale of the downturn experienced over the autumn and winter. The dramatic weakening in financial markets from mid-September, with a sharp decline in the pace of bank landing, led to our focus being on the effect of a serious credit crunch on the wider economy and the level of Bank Rate prevailing then was clearly too high.
'Consequently I supported the co-ordinated 50 basis point cut in October, and the subsequent rapid pace of cuts taking Bank Rate to 2 percent in December. By the beginning of 2009, it was evident that the world economy was experiencing a severe and unusually synchronised downturn. Oil and other commodity prices had fallen sharply. Despite a significant depreciation in sterling, the likelihood was that CPI inflation would fall below target over the medium term. World trade growth was declining sharply, and in many countries, including the UK, credit conditions were still tightening. Further cuts in Bank Rate were clearly warranted. I was, however, concerned that from such a low level the impact of Bank Rate reductions would be less powerful. Indeed, particularly given worries about the impact on the lending capacity of some financial institutions at a very low Bank Rate, a perverse effect could not be ruled out.
'It was therefore necessary to consider some alternative monetary policy action to keep inflation on target. I supported the decisions to begin the programme of asset purchases financed by central bank reserves in March, and to expand it in May to 125 billion pounds.
'This considerable monetary injection, around 9% of GDP, is expected to have a number of impacts, including pushing down on the yield curve, supporting asset prices, boosting confidence and increasing nominal demand. With continued concerns over fragility in the financial system, and the ability of financial institutions to supply credit, the risk of a major downward spiral in the economy remained significant through the spring. A robust policy response was highly desirable.'
THE OUTLOOK
'More recently, there have been some encouraging signs in the UK and global economies. The JPMorgan Global Manufacturing PMI has risen for the last five months, although it remains at a low level. In the UK, the CIPS business surveys have both risen. The housing market has seen some positive indicators, with both the major lenders' house prices indices rising in May, and activity picking up a little, albeit from a very low level. However, this more positive data may not presage a sustained recovery. To the extent that rapid destocking exaggerated the downturn, just an end to destocking may flatter the short-term growth improvement.
'The real question is what is happening to final demand, where I believe consumption is likely to be dampened by households seeking to reduce their debt levels, and where a continued constrained flow of credit to firms may hold back investment. In addition, unemployment is expected to rise further through 2009 and be associated with rising repossessions, weighing on the housing market.
'There have also been some recent unhelpful developments for activity: in particular the rise in the oil price, and exchange rate appreciation - with the sterling effective rate up around 13 percent from the end of 2008. Recent better data may suggest that the risk of a severe downward spiral has lessened, but overall the outlook does not necessarily suggest a stronger level of economic activity in two years time than implied by the May Inflation Report's central projection, and so the risk of CPI undershooting the target in the medium-term remains.
'Monetary policy may need to remain expansionary for some time to come. With inevitably greater uncertainty about the impact of asset purchases, as opposed to the more normal tool of Bank Rate, there will be further difficult policy judgements over whether the MPC needs to add to the presently planned stimulus.'
EXPLAINING MONETARY POLICY
'Over the past year, I have given two on-the-record speeches relating to monetary policy. In addition to comments on the conjuncture, in September 2008 I discussed some criticisms of the inflation target. In March 2009 I considered a puzzle around relatively high real UK short-term interest rates during the MPC's first decade.
'I have made seven regional visits, visiting a variety of companies and holding discussions with many business groups; and also visited some major companies in London. I have given a number of other presentations on monetary policy, including four at universities and two for schools, and undertaken a number of regional and national media interviews.' Keywords: BRITAIN BANK/BARKER
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