LONDON (MNI), Feb 29 – The following is a transcript of the opening
exchanges of the Treasury Select Committee hearing Wednesday with
members of the Monetary Policy Committee. Questions are paraphrased.
Q: Will QE2 be as effective as QE1 ?
MPC member Adam Posen: “I think it will be. I think, as Deputy
Governor Tucker has said on previous ocassions, as he and I discussed
roughly a year ago, there is one major difference between QE now versus,
say, in 2009. It is we don’t have the outright lock-up and panic in the
markets.”
“And there is an added benefit in the sense of being in a bad
situation that QE alleviates that problem and adds confidence.”
“Thankfully, we are not in that kind of overt bad situation, so we
don’t get that additional benefit. But all the other channels for
quantitative easing, which my colleagues have discussed and which were
published about in the Quarterly Bulletin, remain operative.”
“They are not as visible and as easily traced as they sometimes are
when monetary policy is using only interest rates although I think one
of the things we have learned from communication is that people had
taken for granted, too much, the way interest rates used to work even in
the good old days.”
“So the bottom line is except for that additional fillip when there
is a panic response which, thankfully, is not one of our problems now, I
expect QE to be just as effective as it was.”
Q: Do you think QE made less effective by forestalling in the
markets ?
Posen: “I do not. I think there are problems, and I have gone on
the record several times as have other members of the committee about
the pass through of the interest rates, through fees … on what
borrowers are being charged, the availability of credit but I don’t
think that directly impedes QE.”
“I think QE works through the asset price channel, through various
other channels, which are detailed in the Quarterly Bulletin. It will
continue to be effective.”
“It remains on the agenda, regulatory, legislative and otherwise,
to improve finanancial functioning in this country but QE is not the
issue.”
Q: Will the impact of QE2 be in direct proportion to the BOE’s
assessment of the impact of QE1 (1.25pp on annual CPI at peak) ?
BOE Governor Charles Bean: “Yes. The numbers you quote are
obviously the result of the staff analysis of the first phase and, at
this juncture, as Adam has already told you, we expect the key channels
to operate in the same fashion in this round of asset purchases as they
did in the first one.”
“Clearly it may turn out that they are slightly different, but at
this stage … it would be perfectly reasonable to pro rate them in the
way that you suggest.”
Q: What have we learned from Japan’s recent economic history about
the limits of monetary policy ?
Posen: “I think what is true is the Japanese experience teaches us
many things, but on the part of monetary policy it … reinforces the
importance to act quickly.”
“I think that if you look at what happened in Japan versus what
happenened in the UK, the Japanese central bank at the time in the 90s
was slow to react.”
“And, so, their situation was every bit as bad as ours despite the
fact that they had a booming world economy to which they were exporting
at the time and an undervalued exchange rate.”
“In other words, I think you could make the comparison and see
meaningful difference in our performance given the circumstances because
we were faster to the block with QE and with aggressive interest rate
cuts.”
“The second thing that Japan teaches us which, perhaps doesn’t fit
with people’s beliefs about what I have said, but it has to be
recognized as a reality, is that deflation, if you fall into it, is
going to be stickier and a little less dampening on the economy.”
“When I first came before this committee, when I was nominated for
this position, I wrote a bit about that and I stated, and it remains
true, that deflation is much worse than a little inflation and it is
very hard to get out of but you don’t get into this downward core of the
spiral that some of us worried about in Japan’s case.”
“There was a lot more stickiness in the system … Even with very
flexible labour markets, like here in the UK and like Japan, where we
are both very similar, we have very flexible labour markets on
international comparisons, there are limits as to how much you can crush
wages.”
“There is, what they call, downward nominal rigidity. So you can
fire people, you can cut their overtime, you can give them no raise but
it is very hard to get people to take pay cuts – not impossible but, on
average, it is hard to get that to happen.”
“And so, that means that you have a bit more of a floor to
inflation than you might have thought because wage growth tends to be
zero or above, even in very bad times and that helps explain in my view
part of the UK’s performance in ’09/10 that the wage growth went down
but there wasn’t as much fall in wages, as much cut, as maybe the
situation needed.”
Q: In 2011 you noted the differences among MPC members on forecasts
were markedly wider than usual, is that a good thing or a bad thing ?
Posen: “The process thing is a good thing. As an event it is a
bad thing.”
“To this end I would note, and I believe the Governor made a
similar characterisation at various points, and that is where I want to
praise the process.”
“This meant … in the strong tradition and mode of the Monetary
Policy Committee since its founding that individual members are
accountable for their views in a way they are not in other major central
banks and that individual members can differ with the Governor, with the
majority of the committee and, ideally constructively, and I hope I was
constructive, in a way that is constrained at most other central banks.”
“Over time, one believes that this should lead to both better
policy choices and more accountable policy.”
“So, to me, the fact that there were these differences, that I was
under no pressure to change my position, that in fact I was able to,
backed by the staff and by fellow members of the committee, to hold to
my position and state it clearly was a triumph of process.”
“That said I remain frustrated in myself that if the committee,
agreed in a sense, in September/October of last year that more policy
ease was warranted, to me the arguments made have been quite debatable a
year ago in January/February 2011, but by summer of 2012 I would have
liked to have thought the arguments were pretty clear.”
“So, there was a sense of frustration that I was unable to be
persuasive in moving the committee at that point.”
— London Bureau +20 7862 7491; drobinson@marketnews.com
[TOPICS: M$$BE$]
