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
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 this
opportunity to respond directly to some of the serious concerns that have been expressed recently by
Trade Union leaders - among others - about monetary policy.
Let me start with what is perhaps your biggest concern. You think that the Monetary
Policy Committee, which I chair and which sets interest rates, is only interested in controlling
inflation and takes little or no account of the effects of its decisions on real economic activity and
jobs. Some of you evidently think that's because we're a crowd of "pointy-heads" or "inflation
nutters", or even "manufacturing hooligans" - and I'm not sure these descriptions are intended as
terms of endearment. More seriously some of you think that the problem lies with our remit from the
Government which is first, to maintain price stability - defined as an underlying inflation rate of
21⁄2%, and, subject to that, to support the economic policy of the Government, including its
objectives for growth and employment.
Whatever the reason, your concern is that we place too much emphasis on holding
prices down and not enough on keeping growth and employment up. The implication is that you see
a trade-off between inflation and the rate of economic growth, so that if only we'd let up a bit on
controlling inflation then this country could enjoy higher activity and lower unemployment, which
are the really good things in life - or at least we could avoid some of the worst damage that is
currently being inflicted upon the whole of the agriculture, large parts of manufacturing industry and
even some services sectors.
And that might even be true for a time. The trouble is that, in anything other than the
short term, it would be likely to mean more rather than less economic damage, and lower rather than
higher growth and employment.
Often in the past in this country we behaved as if we thought that promoting higher
growth and employment - which of course is what we all want to see - was largely a matter of
pumping up demand. We paid too little attention to the structural, supply-side, constraints. All too
often we tried to buy faster growth and higher employment even at the expense of a bit more
inflation. In effect we tried to squeeze a quart out of a pint pot. And you all know the result - rising
inflation and a worsening balance of payments, which eventually could only be brought back under
control by pushing up interest rates dramatically and forcing the economy into recession. I don't
need to remind you of the really miserable social as well as economic consequences - as right across
the economy people lost their jobs, their businesses and their homes. More insidiously, repeated
experience of boom and bust produced a pervasive short-termism in business behaviour which
infected both industry and finance and - dare I say both employers and employees - however much
we all like to blame everyone else. Everyone was tempted to grab what they could while the going
was good.
But we have learned from that experience. We've learned that in anything other than
the short term there really is no trade-off between growth and inflation. What we are trying to do
now through monetary policy is to keep overall demand in the economy growing continuously
broadly in line with the capacity of the economy - as a whole - to meet that demand. Both the
previous Government and the present one set a low inflation target as the immediate objective of
monetary policy, not as an end in itself, but in effect as a measure of our success in keeping demand
in line with supply. So the real aim is to achieve stability across the economy as a whole in this much
wider sense.
Now, there is not a lot, frankly, that we can do directly through monetary policy to
affect the supply side - the underlying rate of growth that can be sustained without causing inflation
to rise. That can be influenced by the whole raft of Government policies, ranging from education and
health to taxation and social security, and it depends ultimately on the ingenuity, the productivity,
and the flexibility, of the economy. Employers and employees, working together, clearly have a
crucial role to play in this context, and I recognise the constructive and forward-looking role that
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 give is
to keep overall demand consistently in line with that supply-side capacity - not letting it run above
capacity but not letting it fall below capacity either - as reflected in consistently low inflation. That
way we can moderate rather than aggravate the unavoidable ups and downs of the business cycle,
enabling steadier growth, high levels of employment and rising living standards to be sustained into
the medium and longer-term. And if we can do that, then we will contribute indirectly to the supply
side by creating an environment which encourages more rational, longer-term, decision-making
throughout the economy.
I would hope, Chairman, that on this basis we could all agree at least on what it is we
are trying to do. The debate is not about the ends it is about the means. We are every bit as
concerned with growth and employment as you are - as anyone in their right mind must be. But we
are interested in growth and employment that is sustained into the medium and long term. And
permanently low inflation is a necessary condition for achieving that.
But, even if we agree on the objective, that still of course, leaves plenty of room for
us to disagree about what that means for the actual policy stance - the level of interest rates - at any
particular time. In fact, as you may have noticed, because we are wholly open about it, even the
individual members of the MPC have been known to disagree about that - at the margin. Outside the
MPC, a lot of people say to me - "OK I agree we don't want to return to boom and bust, but you are
still overdoing it. From where I sit, or from what I'm told," they say, "we're headed for recession
just hours away". Sometimes they imply by that that we are also going to undershoot the inflation
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 to
the economy, to know that interest rates are "clearly far too high" or "clearly far too low", and the
present time is no exception. It's been difficult recently to hear yourself think above the deafening
noise of opinions on the state of the economy, which, understandably, often reflect the situation in
their particular neck of the whole economy wood.
The truth is that neither we, nor they, nor anyone else, can know with any great
certainty precisely where demand is in relation to capacity in the economy as a whole. Still less do
we know where it is likely to be over the next couple of years - and that is the more relevant
consideration, given the time it takes before changes in interest rates have their full effects. Monetary
policy is not a precise science - we've never pretended that it is. But it can't be just a matter of
sweeping, broad brush, impressions based upon partial information either. What we have to do is to
make the best professionally-informed analysis we can, of all the sources of information available to
us, relating to every sector of the economy and every part of the country, and then constantly review
and as necessary modify our judgements, month by month and quarter by quarter, in the light of the
flood of new information as it becomes available.
And that, of course, is exactly what we do in fact do - using the vast array of official
economic statistics and financial market data, all the publicly available and some private surveys and
commentaries, as well as a wealth of anecdotal and structured survey evidence that we collect
ourselves, through our 16 non-executive directors, through the frequent visits which MPC members
make around the country, and through meetings in London, and through our network of 12 regional,
information-gathering and disseminating, agencies with their 7000 industrial contacts throughout the
United Kingdom. And we openly display the facts as they are available to us, as well as our analysis
and our conclusions, regularly through the publication of the minutes of our monthly meeting and in
the quarterly Inflation Report.
So when people say to me that the economy is headed for recession, I'm interested in
comparing the evidence on which they base their views with our own evidence, and I want to know
whether or not they are also saying that they expect us to undershoot the Government's inflation
target.
Let's just for a moment turn down the noise and look at some of the relevant facts as
they relate to the economy as a whole.
Since the economy started to recover from recession in the spring of 1992 - some 61⁄2
years ago - overall output has grown at an average rate of about 3%. That is well above the trend rate
for the past 20 years, of just over 2%. Employment has increased by 1.2 million over this period,
while unemployment has fallen almost month by month, on the familiar claimant count measure,
from a peak of over 10% in 1993, to some 4.7% now. That is the lowest rate for 18 years. Meanwhile
retail price inflation (on the Government's target measure) has averaged around 23⁄4% - that's the
lowest for a generation. There's not much evidence here that low inflation inevitably means low
growth and employment.
But, of course, we started this period with demand below capacity - with a fair
amount of slack in the economy which we were gradually taking up. By last year it had become
clear, in the evidence of rising capacity utilisation and of growing tightness in the labour market, that
unless we acted to moderate the growth of demand we were at risk of overheating. That's why we
tightened policy over last summer - to slow things down before inflation took off - and to head off a
subsequent recession. And although, as I say, you can never be sure - economic forecasting is a very
uncertain business - a necessary slowdown rather than a more serious recession is what we think
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 economy.
Domestic demand for goods and particularly for services has been unsustainably strong and large
parts of the economy have been doing very well on the back of that. But the sectors which are most
exposed to international competition have been suffering enormous pressure as a result, initially, of
the exaggerated strength of sterling - especially against the major European currencies in the run up
to decisions on the euro; and as a result subsequently of the successive waves of turmoil spreading
through large parts of the global economy. Overall demand growth - at least until fairly recently
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 parts
of the economy were under the hammer - we have been as conscious of that as anyone. Still less was
it that we didn't care - we care, just as you must, about activity and jobs in all sectors of the
economy. But the stark choice confronting us was either to tighten policy, knowing that that would
inevitably increase the pain which the internationally exposed sectors were already suffering, or to
disregard the developing excess overall demand in order to protect the internationally-exposed
sectors from further damage.
This second course might have meant less pain for the internationally-exposed
sectors in the short run. But it would have meant putting the whole of the economy, including the
exposed sectors, at risk of accelerating inflation, and it would in all probability have meant a much
sharper downturn in the economy as a whole a little further ahead. We've been round that buoy all
too often before. And so we tightened policy, trying as best as we could through our tactics to
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 in the
exposed sectors - but there's no point in pretending things are other than they are. The present
imbalance means that we are trying to maintain stability in extraordinarily difficult circumstances.
But I will make one final point. The inflation target we have been set is symmetrical.
A significant, sustained, fall below 21⁄2% is to be regarded just as seriously as a significant, sustained,
rise above it. And I give you my assurance that we will be just as rigorous in cutting interest rates if
the overall evidence begins to point to our undershooting the target as we have been in raising them
when the balance of risks was on the upside. There is now evidence that domestic demand growth is
moderating, as it must do, and that the labour market is tightening more slowly than before. On top
of that, as we said in our press notice last Thursday - announcing that we had not changed interest
rates - we recognise "that deterioration in the international economy could increase the risks of
inflation falling below the target". That is still not the most likely outcome in the eyes of most of us
and given the real world uncertainties we can anyway never sensibly tie our hands. But there is no
doubt in my mind that recent international developments have at least reduced the likelihood that we
will need to tighten policy further.