Mr. George discusses monetary policy, unemployment and economic growth in the United Kingdom  (Central Bank Articles and Speeches, 15 Sep 98)
Central bank: boe | Type: speech | Date: 1998-09-15

Mr. George discusses monetary policy, unemployment and economic growth in Speech by the Governor of the Bank of England, Mr. E.A.J.

George, at the United Kingdom TUC Congress in Blackpool on 15/9/98.Thank you, Chairman.

I'm actually very pleased to be here, and to have opportunity to respond directly to some of the serious concerns that have been expressed r Trade Union leaders - among others - about monetary policy.Let me start with what is perhaps your biggest concern.

You think that the Mo Policy Committee, which I chair and which sets interest rates, is only interested in inflation and takes little or no account of the effects of its decisions on real economi jobs.

Some of you evidently think that's because we're a crowd of 'pointy-heads' or 'i nutters', or even 'manufacturing hooligans' - and I'm not sure these descriptions are in terms of endearment.

More seriously some of you think that the problem lies with our remit Government which is first, to maintain price stability - defined as an underlying infla 2½%, and, subject to that, to support the economic policy of the Government, includ objectives for growth and employment.Whatever the reason, your concern is that we place too much emphasis on hold prices down and not enough on keeping growth and employment up.

The implication is that yo a trade-off between inflation and the rate of economic growth, so that if only we'd let controlling inflation then this country could enjoy higher activity and lower unemploymen are the really good things in life - or at least we could avoid some of the worst dam currently being inflicted upon the whole of the agriculture, large parts of manufacturing even some services sectors.And that might even be true for a time.

The trouble is that, in anything other short term, it would be likely to mean more rather than less economic damage, and lower ra higher growth and employment.Often in the past in this country we behaved as if we thought that promoting growth and employment - which of course is what we all want to see - was largely a ma pumping up demand.

We paid too little attention to the structural, supply-side, constrain often we tried to buy faster growth and higher employment even at the expense of a b inflation.

In effect we tried to squeeze a quart out of a pint pot.

And you all know the inflation and a worsening balance of payments, which eventually could only be brought back control by pushing up interest rates dramatically and forcing the economy into recessio need to remind you of the really miserable social as well as economic consequences - as ri the economy people lost their jobs, their businesses and their homes.

More insidiously, experience of boom and bust produced a pervasive short-termism in business behaviour infected both industry and finance and - dare I say both employers and employees - howeve we all like to blame everyone else.

Everyone was tempted to grab what they could while th was good.But we have learned from that experience.

We've learned that in anything other the short term there really is no trade-off between growth and inflation.

What we are tr now through monetary policy is to keep overall demand in the economy growing continuo broadly in line with the capacity of the economy - as a whole - to meet that demand. previous Government and the present one set a low inflation target as the immediate obj monetary policy, not as an end in itself, but in effect as a measure of our success in kee in line with supply.

So the real aim is to achieve stability across the economy as a whole wider sense.Now, there is not a lot, frankly, that we can do directly through monetary p affect the supply side - the underlying rate of growth that can be sustained without causi to rise.

That can be influenced by the whole raft of Government policies, ranging from educ health to taxation and social security, and it depends ultimately on the ingenuity, the and the flexibility, of the economy.

Employers and employees, working together, clearly crucial role to play in this context, and I recognise the constructive and forward-looki many of you are now playing to improve the supply-side capacity of the economy.Monetary policy operates on the demand side.

And the best help that we can gi to keep overall demand consistently in line with that supply-side capacity - not letting capacity but not letting it fall below capacity either - as reflected in consistently low way we can moderate rather than aggravate the unavoidable ups and downs of the business enabling steadier growth, high levels of employment and rising living standards to be sust the medium and longer-term.

And if we can do that, then we will contribute indirectly to side by creating an environment which encourages more rational, longer-term, decisionthroughout the economy.I would hope, Chairman, that on this basis we could all agree at least on what are trying to do.

The debate is not about the ends it is about the means.

We are ev concerned with growth and employment as you are - as anyone in their right mind must be. are interested in growth and employment that is sustained into the medium and long ter permanently low inflation is a necessary condition for achieving that.But, even if we agree on the objective, that still of course, leaves plenty o us to disagree about what that means for the actual policy stance - the level of interest particular time.

In fact, as you may have noticed, because we are wholly open about it, individual members of the MPC have been known to disagree about that - at the margin.

Outs MPC, a lot of people say to me - 'OK I agree we don't want to return to boom and bust, but still overdoing it.

From where I sit, or from what I'm told,' they say, 'we're headed for just hours away'.

Sometimes they imply by that that we are also going to undershoot the target - sometimes they don't much seem to care about inflation.Now there are always plenty of people who claim to know what's going to happen the economy, to know that interest rates are 'clearly far too high' or 'clearly far too l present time is no exception.

It's been difficult recently to hear yourself think above t noise of opinions on the state of the economy, which, understandably, often reflect the s their particular neck of the whole economy wood.The truth is that neither we, nor they, nor anyone else, can know with any certainty precisely where demand is in relation to capacity in the economy as a whole.

St we know where it is likely to be over the next couple of years - and that is the mor consideration, given the time it takes before changes in interest rates have their full eff policy is not a precise science - we've never pretended that it is.

But it can't be ju sweeping, broad brush, impressions based upon partial information either.

What we have to make the best professionally-informed analysis we can, of all the sources of information a us, relating to every sector of the economy and every part of the country, and then consta and as necessary modify our judgements, month by month and quarter by quarter, in the ligh flood of new information as it becomes available.And that, of course, is exactly what we do in fact do - using the vast array economic statistics and financial market data, all the publicly available and some private commentaries, as well as a wealth of anecdotal and structured survey evidence that weourselves, through our 16 non-executive directors, through the frequent visits which MPC m make around the country, and through meetings in London, and through our network of 12 reg information-gathering and disseminating, agencies with their 7000 industrial contacts throu United Kingdom.

And we openly display the facts as they are available to us, as well as ou and our conclusions, regularly through the publication of the minutes of our monthly meeti the quarterly Inflation Report.So when people say to me that the economy is headed for recession, I'm interes comparing the evidence on which they base their views with our own evidence, and I want to whether or not they are also saying that they expect us to undershoot the Government's target.Let's just for a moment turn down the noise and look at some of the relevant f they relate to the economy as a whole.Since the economy started to recover from recession in the spring of 1992 - so years ago - overall output has grown at an average rate of about 3%.

That is well above the for the past 20 years, of just over 2%.

Employment has increased by 1.2 million over thi while unemployment has fallen almost month by month, on the familiar claimant count mea from a peak of over 10% in 1993, to some 4.7% now.

That is the lowest rate for 18 years.

Me retail price inflation (on the Government's target measure) has averaged around 2¾% - th lowest for a generation.

There's not much evidence here that low inflation inevitably m growth and employment.But, of course, we started this period with demand below capacity - with amount of slack in the economy which we were gradually taking up.

By last year it had clear, in the evidence of rising capacity utilisation and of growing tightness in the labou unless we acted to moderate the growth of demand we were at risk of overheating.

That's tightened policy over last summer - to slow things down before inflation took off - and to subsequent recession.

And although, as I say, you can never be sure - economic forecasting uncertain business - a necessary slowdown rather than a more serious recession is what we're seeing, and, as I understand it, that is what your own General Council thinks too.Our problem in slowing the economy down has been enormously complicated by the increasing imbalance between the domestic and the internationally-exposed sectors of the e Domestic demand for goods and particularly for services has been unsustainably strong an parts of the economy have been doing very well on the back of that.

But the sectors which exposed to international competition have been suffering enormous pressure as a result, i the exaggerated strength of sterling - especially against the major European currencies in to decisions on the euro; and as a result subsequently of the successive waves of turmoil through large parts of the global economy.

Overall demand growth - at least until fairly remained excessive and the labour market has continued to tighten.The question was what should we do?

It was not that we didn't know that large of the economy were under the hammer - we have been as conscious of that as anyone.

Still it that we didn't care - we care, just as you must, about activity and jobs in all s economy.

But the stark choice confronting us was either to tighten policy, knowing that t inevitably increase the pain which the internationally exposed sectors were already suffe disregard the developing excess overall demand in order to protect the internationall sectors from further damage.This second course might have meant less pain for the internationally-exp sectors in the short run.

But it would have meant putting the whole of the economy, incl exposed sectors, at risk of accelerating inflation, and it would in all probability have sharper downturn in the economy as a whole a little further ahead.

We've been round that too often before.

And so we tightened policy, trying as best as we could through our minimise the unwanted upward pressure on the exchange rate.I know, Chairman, only too well that this will be cold comfort to many of you exposed sectors - but there's no point in pretending things are other than they are. imbalance means that we are trying to maintain stability in extraordinarily difficult circuBut I will make one final point.

The inflation target we have been set is symm A significant, sustained, fall below 2½% is to be regarded just as seriously as a significa rise above it.

And I give you my assurance that we will be just as rigorous in cutting int the overall evidence begins to point to our undershooting the target as we have been in ra when the balance of risks was on the upside.

There is now evidence that domestic demand gr moderating, as it must do, and that the labour market is tightening more slowly than befo of that, as we said in our press notice last Thursday - announcing that we had not chang rates - we recognise 'that deterioration in the international economy could increase t inflation falling below the target'.

That is still not the most likely outcome in the eyes and given the real world uncertainties we can anyway never sensibly tie our hands.

But th doubt in my mind that recent international developments have at least reduced the likeliho will need to tighten policy further.