News Release
"Monetary Policy: Significant Issues of Today" - Speech
by Sir Andrew Large
1 December 2005
Speaking to West London Business this afternoon, Sir Andrew
Large gives his last public speech as Deputy Governor of the
Bank of England. In his speech, he draws attention to four significant
issues that have been of particular interest to him while on
the Monetary Policy Committee: oil, debt, the labour market,
and pensions and longevity.
Reflecting on the recent increases in the price of oil, Sir
Andrew notes the possibility of inflationary pressures. He says:
“I think it is still too early to relax in relation to
inflation expectations, and I think that the subject of oil
will feature as a significant issue for some time to come in
the monetary policy arena.”
Discussing the potential impact on consumption of changes in
household debt, he noted: “As far as debt levels are concerned,
for me the key issue for monetary policy is that the more capital
gearing or leverage increases the greater the vulnerability
to shocks and the consequent adjustment to consumption behaviour.
In my experience as leverage increases, so the level of debt
ceases to be a mere residual and becomes more of a determinant
of behaviour in its own right, and hence becomes of real consequence
for monetary policy.” He asks whether borrowers are becoming
more cautious in the light of already high debt-to-income ratios
and whether there are changes in the attitudes of lenders which
might reduce the supply of lending. Sir Andrew asks: "…has
the stabilisation in house prices led homeowners to become more
conservative or precautionary in their borrowing habits, realising
that they can no longer assume that their debt will be offset
by significant increases in house prices? Secondly, could the
attitude of lenders have contributed to the downturn, through
the withdrawal of credit?"
He notes the need to consider the labour market in a global
context, because in assessing the size of the market we can
no longer think of it being constrained by the UK as a geographic
entity. Commenting on the increase in supply of labour from
migrant workers, Sir Andrew says: “So if we have already
allowed for this increase in migrant workers, a key question
is whether the rate of influx will continue and, if it does,
what will the net effect be on demand and supply in the economy?”
Turning to pensions, he raises the question of whether there
will be significant changes in consumption as people save more
for their retirement. “For monetary policy the key issue
is how and over what timeframe will these changes impact on
savings, which at a domestic level are likely to have to increase
to provide adequate income in retirement…And the question
is whether these changes will be smooth trends, or whether there
will be more sudden, and perhaps unpredictable shifts or discontinuities
in behaviour. And if the latter, will they be of sufficient
magnitude to be relevant to shorter-term monetary policy?”
Finally, in describing his own voting record, Sir Andrew says:
“I am very conscious that I have collected the description
of being a ‘hawk’: of erring on the side of rate
rises. Certainly my willingness to allow thoughts about insurance
to influence decisions at the margin, has meant that on the
occasions when I have voted with the minority it has been on
the upside for rates. But equally the longer term issues, such
as those of labour supply and pensions saving, are more likely
to manifest themselves on the downside. I am certainly very
conscious of these factors too….”
Note to Editors
As already announced, Sir Andrew is to leave the Bank shortly
after the MPC meeting in January.
Key Resources
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“Monetary Policy: Significant Issues
of Today” Speech by Sir Andrew Large, Deputy Governor, to West London Business on 1 December 2005 Download PDF (166k) |
