Virtual Q&A with Chief Economist, Huw Pill − August 2022

Online Q&A session

About the event

Date: Wednesday 10 August, 5pm to 6pm

We held an online Q&A session with our Chief Economist Huw Pill. He answered questions about the rising cost of living, and what we are doing about it.

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  • Hello everybody and a very big welcome to today's Q&A session with the Bank of England's chief economist Huw Pill. Really happy to have people joining us today from all around the UK and really looking forward to hearing a big, wide range of views on the UK economy.

    So you can now start submitting your questions through the Q&A function on Teams, and if you're happy to include your name and say where you're from with your question, then that would be great. It's nice to have a sense of who's asking the questions. And just to let you know that today's event is being recorded.

    So my name is Juliette Michaelson. I'm the deputy CEO of Economy. My background is as a researcher and I spent about 15 years working on exploring different ways of doing economics differently.

    And Economy is a charity that started life in 2016. Our mission is to work with people to help them collectively understand, reimagine and change the economy. A poll of the UK public last year found that less than one in five people felt they were able to influence decisions about the economy that affected their lives. And we also know that there were huge inequalities in who has access to knowledge about the economy and whose views are listened to by economic decision makers. So our work is about helping people feel confident to engage with discussions and debates on economic issues that affect all of our lives, including by running workshops and supporting people to tell their own stories about how the economy intersects with their own diverse lives in the UK.

    So we are all about making economics as accessible and relevant to people's lives as possible, and we're going to try to embody that in today's session by avoiding jargon wherever we can. And you can find out more about us at

    So, given our interest in involving more people in economic decision making, we were really pleased to be asked last year by the Bank of England to partner with them to develop a new online platform for members of the Bank's Citizens' Forum community and the platform is called the Economy hub, and the aim is to help the Bank improve its understanding of how its work impacts the public. And the hub aims to help its users do three things. Firstly, to explore - so understanding what the bank does and how that relates to their lives. Secondly, to share - so to contribute their ideas, views and priorities. And thirdly, to collaborate - so come together and discuss these ideas with other users of the hub and with Bank staff, including through video chats and workshops. As you'd expect, Hub users have recently had a lot of discussions about cost of living and inflation over recent months, but we've also recently had deep dives into issues like housing and the Bank's work on climate change.

    You can sign up to use the hub by becoming a member of the Bank Citizens' Forum community and you should have got information on how to do that when you registered for this event, but you can also search online for Bank of England Citizens' Forum and that will bring up where you can, where you can then apply to join.

    And just a reminder to keep submitting your questions for today through the Q&A function on Teams.

    But now I'm very pleased to introduce Huw Pill. Huw is the bank's chief economist and executive director of monetary policy. He is a member of the Monetary Policy Committee who make the decisions on the level of the bank, right? So the interest rate decisions that have been under so much scrutiny of late, and he's also responsible for the analysis that the bank uses to make monetary policy decisions and for research across the bank.

    He has previously worked in the private sector at Goldman Sachs, as well as at the European Central Bank and at Harvard Business School, and I was interested to see you that you had a stint working at the Bank of England right at the start of your career in the early 90s, which was another period of real economic difficulty in the UK.

    So it would be great if you could start us off by giving just a very brief overview of the most recent monetary policy report and interest rate decision, and then we'll get down to the main business of answering audience questions. So thank you, Juliet and hello everyone, and thank you for joining us this evening for what I hope can be an interesting and informative interactive session. I hope it's not a causal feature of me being at the bank and things being challenging because I think things are challenging now.

    We've just published our new monetary policy report and that recognizes the very elevated level of inflation and reveals a forecast that inflation is going to be at double digit levels towards the end of this year.

    That is not a good outcome I think. For anyone it's an uncomfortable situation for someone like me who as you've said, is a member of the Monetary Policy Committee here at the bank and who's charged with achieving an inflation target of 2%.

    But I think we have to recognize we do recognize that you know that level of discomfort is there's nothing to the challenges. Many people outside this building faith in addressing the cost of living issues, the cost of living crisis, which is opposing very difficult questions about how they can run their lives, feed their families and and so forth. So we're very aware that the stakes are high and we have an important responsibility. Think there are three big questions that the current situation poses. How have we got to a situation where inflation so high?

    What are we doing to address that and where are we going to end up?

    So, very briefly, I hope we can get into that in more detail as we go through the session. But very briefly, I think what has driven inflation to this high level, the most important element, the most important driver has been rises in International Energy prices. International gas prices. And we know that the source of some of the changes there are geopolitical events in Ukraine. We've seen restricted supplies of gas into Europe. That's driven up prices, and the UK is a net importer of energy, particularly of gas is facing higher prices as a result, and that's fed through into UK inflation.

    What are we doing about it? Well, the bank is committed to returning inflation back to target in order to do that, it needs to ensure that the high elevated levels of inflation we're seeing today don't become embedded or ingrained in the behavior that sets domestic British prices. Domestic British wages and achieve a kind of lasting momentum away from the target. And in order to do that, we've had to tighten monetary policy.

    That means raising interest rates. We recognize that higher interest rates impose their own costs on members of the public, not least those with mortgages. Those with borrowing outstanding. But we believe very strongly that it's crucial that we do act with monetary policy to bring inflation down closer and eventually back to target in order to avoid that. The uncertainties that high inflation causes mean that we don't see investment we don't see in planning, and we create costs for the economy.

    Which are more lasting?

    And so you know, in response to the third question, where are we headed? I mean, I think we are set. Unfortunately for a difficult time in the face of this geopolitical events, these high levels of energy prices and our response to them. But ultimately I'm confident, and I would impress upon everyone who's listening that we will get inflation back to this 2% target. And people can rely on the bank to do that over the medium term. So I hope this afternoon we can delve into kind of each of those three questions in a bit more detail, and perhaps flesh out some of the things I just said. In a way that helps people.

    Understand what our agenda is. I mean, this is one part of a broader agenda the bank has to engage with others, as Steve said. And you know, there's a number of events and panels and forums coming up around the country. I think we're going to have a panel in Durham in in Liverpool, and I'll be at one in Belfast next month, so I'm very much looking forward at the end of the day to having further opportunities down the road to engage with people. But perhaps Juliet, I can hand back to you. I guess it's time to face the music of the customers. Right, yes, thank you and and as you said, yeah, I hope we're going to. Yeah, get a really good chance to delve into some of that in detail. So just a couple of things to say before before we do that. So just to say that when we've run previous sessions we we know that we've got really large number of questions, so it might be that we group similar questions together when they're on similar themes so that we cover as many topics as possible. So apologies in advance if if your question doesn't get asked, but we will aim to cover as many as possible, and on that note it would be great if you can keep your answers brief so we can get through lots of them. And as I've said, we're going to try and make sure that we explain any jargon or technical language, and I might kind of try and jump in and and. And point out reminders sometimes if we need help with that. So without further ado, let's go to the first question. And so this is the cost of living is already a challenge, and the proportion of our income I spend on bills is very high. Isn't raising interest rates going to make this worth? Like you said, I mean, it is important that we used to try and understand and recognize the challenges that the cost of living squeeze on incomes that we're seeing now. The challenges that is posing for people living outside the economy. Some people are struggling. Some people are facing difficult choices. I think we're very aware of our responsibilities in addressing some of these challenges. I think we're also aware that our measure to contain the inflationary pressures. We're currently facing those inflationary pressures that have their source in this rise in International Energy prices that's pushing inflation in the UK up to the the kind of elevated levels we're seeing right now. I think it's very important that we use monetary policy to prevent that that high level of inflation becomes ingrained, becomes persistent, and lasts indefinitely, and imposes costs over the medium term through time and the tool we have to do that is tightening monetary policy. It's raising interest rates now in the short term. Higher interest rates means higher mortgage payments. It means higher loan payments if you have outstanding loans. It probably means some slowing in the economy. Other things equal. But our key sort of ambition is to ensure that we don't allow. The inflation we're seeing today to become ingrained in the system to become so persistent that not only do we have to live with it for longer, but we also will find it as it becomes embedded more costly to get rid of. So what we're trying to do is head off that ingrained this or that embeddedness taking hold by. Tightening monetary policy today, containing inflation today to ensure that over the medium term through time that we don't get into this difficult situation and it's by keeping inflation in line with target credibly ensuring that inflation is going to return to the 2% target that we can avoid the costs that would be incurred if inflation were allowed to get under control and we had to take much more aggressive measures down the line in order to reestablish that anchor that the inflation. Budget provides, so is it a fair summary to say yes, it might feel worse in the short term, but the the banks view is that in over a longer time frame it it's better. Well I think the short times would be yes, but it's not just that it's better, it's that I think the costs that inflation imposes are ones that are very disruptive to everyone. They're very disruptive society. They're very disruptive to planning. They mean that you can't invest in the future. You don't know how to plan your personal life. You don't know how to plan the life of your business. And So what we're trying to do is establish and maintain an environment where you can be assured that through time, inflation is not going to run away from our target. You can be assured that 2% is something you can rely on, and plan on the basis of on and that will allow the economy to perform much better through time. We can't escape from the need to do that. If we let things take the kind of quote easy way out in the shorter term. And we do say, OK, we're not going to tighten monetary policy. The threat is we allow inflation and the disturbance is not just to exist today but to become embedded in the system. And as I said, not only does that mean we have to live with the consequences of inflation for longer, it's harder to plan for longer. And that means planning is more difficult and we get less investment and so forth. But also eventually we will have to try and cure. The inflationary dynamic and the more it has become embedded, the more costly it will be down the road in order to get rid of it. So I think by acting early, acting promptly and acting efficiently, we can avoid some of the costs that otherwise would be OK, great, well this this feels like a really good point to bring in our second question, which is what will be the sign. Interest rate increases are successfully combating inflation. Well I think you know the starting point. There is, as I think, the last few months have illustrated. When we change interest rates, we can't control prices immediately, otherwise we'd already have got inflation down because our commitment is to to reattain the target. The target of 2% as soon as we can. But monetary policy is not a cure all for everything. It's quite a powerful instrument, potentially, but it's quite a blunt instrument, and crucially, it's an instrument that works with quite a long lag. So the rise in energy prices we've seen over the last six months has passed through into UK inflation pretty quickly. And even though we've responded to it by raising interest rates, the impact of those raise rises and interest rates on British inflation is probably going to take a year, year and a half, maybe as much as two years to have its full effect. So in the immediate term, we haven't been able to offset this big rise in UK inflation. That's why UK inflation is rising. As I've said, we're forecasting in the short term to go towards double digit levels, but the measures we're taking now are those which are going to bring inflation down back to target in the future. And again, I don't want to repeat myself too much, but the crucial thing is, it's not that we can offset the immediate impact of inflation coming from energy prices, because energy prices are being determined by events in Ukraine and international markets over. Don't have much influence, but what we can do is ensure that the heightened inflation we're seeing today is not influencing price setting by British firms weight setting by British firms and unions bargaining in the labour market in a way that then becomes ingrained in the system. So the the key thing that will determine whether we're being successful or not is whether we see that wage developments and price setting developments in the UK. Remain consistent or brought into line with the 2% inflation target. At present, wage growth is probably running a little bit too fast. At present. The evidence we have looking at the pricing behavior of firms in the UK economy is that they probably are setting prices and passing through costs a little bit too aggressively. So what we'll be looking for is some slowing down in these two developments, which is suggesting to us that these domestically generated parts of inflation, which are the ones that live longer. And are more dangerous because they threaten to become persistent and ingrained. They're the ones that monetary policy can affect, because by the nature of persistent things, they will still be there when the lags of policy transmission two years down the road unwind. It's that that we need to keep under control and consistent with 2%. I think we have to accept that in the short term, the volatility and inflation of some volatility. Inflation is inevitable. And unfortunately, when we're hit by these very big external disturbances, and I think you know it is important to emphasize that. The recent rise in gas prices in Europe. Is really quite exceptional in nature. It's almost unprecedented nature. The crucial gas price for January 2023, which is underlying things like the off Gen CAP and so forth that we hear about in the news. That's risen by 7 times over the last year, so this shock to inflation. This disturbance. This driver inflation coming from outside, is really very very large. We can't offset that, but what we can do is ensure that that doesn't lead to developments in the UK, which are persistent. And lead to this drift away from target. That was so concerned about. So the crucial thing for us is to ensure that domestic price setting domestic wage setting even in the face of the big disturbance coming from higher energy prices doesn't become incompatible with our 2% target. And can you explain what is domestic price setting? It sounds like it's not. That's not just the general rise in prices, it's something more specific. Well, I mean, of course inflation is is something about something we're trying to measure. The general level of prices and inflation is the change in the general level of prices, but the general level of prices is made-up of a lot of individual prices that individual firms are setting. So what we're trying to understand, or one thing we're very focused on trying to understand is if you're a firm you have customers, you have suppliers you have input costs, so you have workers, employees, so you know you're you're subject to a whole set of costs that you have to cover, otherwise you will go bust. But how much of profit? How much of a markup? How much of a margin can you impose on your customers? Going beyond having to cover your costs? That's a pretty crucial determinant of what your prices is. The more power that domestic firms have to build up that profit margin through time. That's going to push up prices. If everybody has that pricing power across the entire corporate sector across all firms, then that's going to push prices up across the board. And that's precisely what's going to generate inflation. So so, from our point of view, one of the things we're trying to look at understand is is. Our firms able to pass through costs on to their customers and are they able to build on top of those costs? Some sort of additional profit margin? And it's the combination of those things. Two things that will determine how much their prices develop, and then in turn at the kind of overall economy wide level that will help to determine what inflation is is is evolved. How efficient is evolving? Great, thank you that that's certainly helpful for me to understand that that is a kind of key thing that you're going to be looking and tracking to see how how the how, the decisions you're making are kind of playing out, so let's go on to question three and which is. Since inflation is so far from the 2% target, wouldn't it be better if this target were changed or even if responsibility for inflation altogether was given back to the government? And I mean, that's an idea we've we've heard starting to be raised in in recent weeks. So I mean, I guess I take exactly the opposite view on those two points and let me try and explain why on the first part of the question of just because. Is it because it's high? Isn't that a reading reason to abandon the target? I would make exactly the opposite argument. It's precisely because inflation is high that the anchor provided by the target and the centrality of the target to what we're trying to do here at the bank becomes even more key. So when inflation is moving along in a relatively calm way, close to target it, it's a relatively easy job for us, and it's a relatively predictable and simple environment for people outside this building. That's the kind of good world that we have lived in. You know. Fortunately, for many of the years over the last 25 years or so when the Bank of England has been running within this so-called inflation targeting regime. But over that 25 year. Inflation on average has been very close to tug. But what we're seeing now is really a very big challenge for that regime, and the test of her regime, the test of a system is not doing well during the good times, because everybody does well during the good times. The test of their regime is how well it does during the challenging the difficult times like the times we face now. So inflation in the UK, as we all know, has risen to high levels. I've tried to explain why it's risen to high levels. It's because of rises in energy tries prices largely because of rises. Energy, prices driven. By geopolitical events. Developments in in Ukraine between Ukraine and Russia, which are really beyond the control of the bank, for sure. Those developments have pushed inflation up. It's precisely when inflation's being pushed up by these external forces that the bank needs to say we're going to do what we need to do. Such that that disturbance doesn't become invested bedded and doesn't lead to drift away from 2%. So the 2% becomes even more central. Even more important, even more at the heart of the anchoring of the system at the time when inflation is moving away. So that's why you know, I would say now is the time to double down on the 2%, not the time to abandon the 2%. And then coming to the second question, which is isn't it time to handle all this over to government and take it out of the hands of people like me? Unelected people who are sort of technocrats or supposed experts who don't seem to be doing their job well. The first thing I'd say to that is we're trying to do a job in difficult circumstances. And maybe you do need some experts in that you don't want to be, uh, necessarily want people who are subject to other forces, political forces and so forth. But second and crucially, and this looks back something I said earlier. Is what what is crucial? I think you make. The point is in the short term we are having to do quite difficult things. We're having to raise interest rates at a time when many households are already under pressure in the knowledge that our rises in interest rates are going to raise mortgage payments and in the short term make things a little bit worse. But we're we need to do that in the short term for the reasons I explained, namely that it's only by getting back to our 2% target and anchoring on that and avoiding this embedding of inflation. Moving away from the 2% target is that we avoid this greater difficulty around the road, so we're taking a little bit of a short term hit in order to get the long term benefits, and that's something that an independent central bank, which is a little bit removed from the day-to-day political forces. That is what an independent central bank to do. A government that has to face by elections or short term elections, and so forth. I think it's harder for it understandably harder for it's not a criticism of governments. The governments are, you know, rightly sensitive to their electorates, and their electorates may have relatively short horizons. In life, particularly governments coming up to elections, they have relatively short horizons in mind, so it's this independence from some of that political pressure that allows independent central banks to take some of the hard decisions today to bring some of the bad news today to recognize some of the challenges that we face today in order to take the action we need to have to ensure the stability over the medium term on which the whole system and you know. Absolutely prosperity and dynamism and employment creation, really. So it's it's sort of like the bank's role is to is to get get us all to take our medicine our our unpleasant medicine, and it's easier to do that, right? Well, as as an independent institution. So I think that's right. So you know, I I joined the bank as I think you alluded to about a year ago. I think in the intervening time things have become more difficult because we've been subject some of these songs, but even when I was joining the bank, I knew I wasn't going to be the most popular person in the world. But I don't think a good central banker should be trying to be the most popular person in the world. A good central banker, a good monetary policymaker, should be what someone who brings the the the table. Yes, we are facing a challenging time. Yes, there are some. There are no easy solutions to these challenges. But we have to confront these challenges and do you know at least what I regard as the right things today in order to avoid allowing these sort of deeper lot more long lasting and more in sort of incipient costs to build up in the system which will eventually be more difficult to overcome in the future. So, you know, I do think there is an element of yes, take your medicine. That's not always a great message to bring, but taking your medicine doesn't make you better in the end. Was I think the danger is if you have someone says don't bother taking your medicine, everything's going to be alright. Trust me, I think you know there are dangers in that that things may get worse before they get better. OK, great, well let's move on to a question from Malcolm on the South Coast and he said I'd be interested to understand the mechanism by which raising interest rates is intended to bring down inflation. And so I think that's a question about like getting into some of the nitty gritty of it. And what effect is raising interest rates expected to have on the rates of unemployment? Now, So what we what we would hope is, and this is this. This goes to sort of one of the the deep seated sort of challenges. And why. As I said earlier, maintaining this focus on our 2% inflation target is so key and particularly key in the crucial times when there are many challenges. So ideally what we would want is to say everyone believes we're going to go back to 2% inflation. So if you go back to the story. They told about what is inflation, what it's people you know, firm setting prices. If the general level of prices is going to rise 2%, you're going to think all your competitors are going to be raising their prices by 2% because everyone's raising prices by the same amount. In that if you try to raise your prices by 3%, no one's going to come and buy your good. They're going to go to your competitors good. So as long as everybody believes the inflation targets 2% and behaves in that way, they impose pressure on others to behave in the same way. It becomes a sort of self fulfilling prophecy, so if the central bank has that level of credibility that we're going to go back to 2%, it maybe doesn't need to do too much in order to bring inflation back to 2%. But at the same time, when we drift away. We need to take action to ensure that that drift away doesn't become permanent. So what we're doing by raising interest rates is trying to ensure that the pricing power that I described the power that firms might have to say wow, demand is so strong. Maybe I can raise my price by 3% today, and so there's so much demand out there that not all by customers will go to other people. If everybody begins to think like that, there is a danger that inflation becomes 3% and then spirals away from the target. So what we're trying to do by raising interest rates? Is to some extent, cool demand in the economy if demand is too strong. Try and reduce the pressure of resources in the economy. Try and reduce the pricing power that some firms have such. They can't set prices at this stronger 3% level and that will slowly bring inflation back to the 2% target that we have, so it's still that sort of mechanism working through the expectations that firms have about what other firms are going to do. The discipline that imposes on their pricing behavior in an environment where demand in the overall economy is evolving, partly influenced by when interest rates go up. Borrowing becomes more expensive. Mortgages take out more. From your weekly income or weekly pay or month so you're able to spend less and cooling demand in that way so it's this interaction between trying to stabilize expectations while at the same time steering demand so there's not too much demand driving prices up and there's not too little demand driving prices down. So and I'm going to come on to the part of the question about unemployment in a minute, but just a couple of things. So so so when cooling the economy you just described it. You are reducing people's spending power when they're having to spend more on their mortgages and so on. And I was just interested and you said something you said, I think, reducing the pressure of resources. Could you explain that a little bit? Yeah, well. I mean, of course it's pretty central to the way economists think about the world. I think it's pretty central to the way most people think about the world that you know when the demand for something is greater than what's available. The supply of something that's going to put pressure on prices, put drive prices up, and it's that driving up prices that tends to cool demand, and mean that we can get demand and supply back in line. So, So what I'm talking about here is when we raise interest rates, we are raising interest rates to make, for example, borrowing more expensive. That means mortgage payments will go up. That means other things equal, there's less money left to spend on other things, so the demand for other things will be cooled off somewhat. It's not that we're trying to engineer some big slowdown in the economy, but what we're trying to engineer is a balance and appropriate balance between the demand in the economy and the ability of the economy to supply things to meet that demand, such that the pressure on prices Nets out to be in line with our 2% inflation target. So it is about steering not too much, not too little, but just right. And I think that's kind of the process we're in, right? OK, so then the second part of the question was about the effect of raising interest rates on unemployment. And yeah, I'd be interested to hear you know is is that part of the envisaged mechanism, by which interest rates help meet the inflation target. Well, just like there is, you know what I was just describing is there's a demand for for a good or some resource it can be too high. It can be too low what we want it to be is just right so that the pressure on that resource leads to the development of prices which are consistent with our target. And that's the anchor. That produces the stability and long term planning environment for investment and more productive economy through time. That same story you can apply to the labour market just like you can reply to the market for any good. And So what we're trying to do in terms of steering the economy using our interest rate tool using monetary policy is to ensure that the demand for labor is not running too hot, which would push up the price of labour. Push up wages very strongly, of course. The wage is 1 cost that feeds into firms pricing decisions. So if wage costs are rising strongly, firms will probably pass that through and that will drive pricing up and that will drive inflation away from target, so we don't want too much demand in the labor market, but equally we don't want too little because too little demand in the labour market will mean that unemployment rises. That will mean that wages will tend to fall. That will reduce costs and that will mean potentially at least that inflation will fall too low. So I mean. And I don't think it's a question of we're using interest rates to create unemployment and so forth. We're using interest rates and monetary policy to steer the economy to ensure its stability. To ensure we meet the inflation target and provide a stable environment in which the decisions that individuals make about their education about their families about whether to buy a house or firms make about whether to invest in new machinery or a new factory. Those decisions can be made safe in the knowledge that they're not going to be wiped out by big. Who wants inflation down the road that make it impossible to plan as all prices are going very volatile. Very crazy in an inflationary environment and interest rates and other financial crises moving in a very erratic ways. So it's that stability that we're trying to create and ensure and. And build that is crucial to the long run environment of growth, employment creation and better productivity. There's ultimately what's driving people's living standards, so it goes back to this point that yes, steering the economy in the short term to avoid moving away from the inflation target creates the environment, which in the long run is very, very beneficial for the society as a whole. OK, great, so we'll. We've got another question on the labour market which is. I'm really fascinated by the labour market trends both here in the UK and abroad. Have you seen any compelling evidence yet of those that became inactive during the pandemic beginning to re enter the labour force? Or is there an alternative scenario where this becomes a long run trend that I? I think that that people have have left the labour market, so I think I mean just to sort of perhaps I I don't want to go too long because I know you asked me to be brief and I haven't. Just met that in my answers so far, but I mean just to set the context. One of the features we've seen over the last few years is in the context of an aftermath of the pandemic. We saw the number of people who wanted to work in the UK economy decline, and of course you know what that means is going back to this sort of keeping the balance between demand and supply. If there's less supply, we need to weigh against demand, we can't grow so fast because we just don't have the number of people to produce the goods that we need. So that reduction in the labor force has been something that's you know. Basically constrained the UK economy. Now why did people leave the labor market during the pandemic? Well, there were a set of younger people who decided to stay in education because they didn't think their job opportunities were very great in a constrained, lockdown type of economy. We have seen a lot of those young people come back into the labor market as the lockdown lockdown has unwound and and the number of people continuing in education is kind of normalized. Back to pre pandemic trends. So there is evidence that things are improving from a labour supply point of view on that dimension. There are also some longer term demographic issues here. Longer term developments in the population. Which probably are less related to the pandemic, but just began to come through at the time the pandemic hit. So one of those is, you know, changes in retirement age with the state pension that were introduced that led actually to female participation in the labor market rising because the retirement age for. Women was raised during a certain. But that process has now been completed, and so there's some leveling off in participation rates because that's no longer changing, but the sort of core issue here is that during the pandemic, we saw quite a lot of people. I mean on that about half a million people, so it's not an unsuitable amount. Leave the labor market, many of whom left on the grounds of ill health or long term illness, and so you know a very key question for us is, will those people come back as the pandemic? Seeds a part of that group are people who have long COVID right? So we don't know how long long COVID is another part of that group is people who have other health issues who in the lockdown environment or sheltering environment didn't want to go into work. And many of those have not yet returned to work historically. People who go from employment into inactivity, particularly those who have long term health problems. They tend not to come back what we're seeing. Is in the environment of pressure on household incomes. The real income squeeze the cost of living crisis? Maybe there is some evidence that some people are coming out. The latest data does suggest we've seen a rise in participation, which does suggest some reversal, but I think that's still quite a tentative conclusion at this stage and and certainly relative to what we expected. Pre pandemic, the labour force in the UK economy is quite substantially smaller still. So I think this is very much an open question. And it's another of those things that we're monitoring very closely in trying to keep this balance between supply and demand. In this case, in the labour market, consistent at well in line with one another in order to be consistent with our 2% inflation target. So it's a pretty key question, right? And the question mentioned abroad. I'm just wondering if whether there's evidence you know how. I mean, I think the UK is in the particularly unique situation in some ways because of the change that around our immigration laws around Brexit and so on. But yeah, is there any evidence? Are there similar patterns in other countries that can help inform that? I think there are similar patterns and there are different patterns, so I mean the so-called great resignation, which is a phenomenon which was very much associated with people. Stopping work during lockdown, say in the US and they're not coming back to work. I mean, I think that dynamic is part of what I've discussed, so I think in the UK there's a stronger health element, at least to where we are now. In the US, it's more a lifestyle choice element. Maybe it's hard to separate those two things, so there are similarities there, but there are also differences, but I think it is key to say you mentioned it yourself that you know the fallout from Brexit and in general more widely changes to the UK migration regime. I mean, that has probably been another. And probably relatively significant contributor to the evolution of the labor force and the balance of demand and supply in the UK labour market. I mean, I think it's very difficult because these things were more or less coincident to separate COVID effects from Brexit effects, so I won't try to do that. I hope you would ask me to do that. I won't try to do that, but I think probably both of those things taken together and interacting with each other have been kind of somewhat different environments here in the UK than elsewhere, so I think we have to. Maintain a sort of independent view recognizing these idiosyncrasies. I don't think we can just rely on evidence from elsewhere. OK, great, well I think I think you might might be pleasing to the next question. So very very has a beautiful simplicity about it. So we've had a few questions on wages and pay rises. Why? Why is it a bad idea for people to want to pay rise? Yeah. So maybe I mean that's a very good question. I'm not sure I accept the premise of that question. I mean more product. The more productive you are, the more you deserve a pay rise. And so you know, I wouldn't say that pay rises are intrinsically problematic or bad. Maybe let me kind of answer the question a little bit elliptically, but hopefully get to the kind of key point because I think it is really very much a central part of the way. At least I personally see developments. It's going to take me a little bit longer, but I hope you allow me. So I've emphasized in several other remarks that what is driving developments in the UK economy in recent times has been the rise in International Energy prices, particularly UK international gas prices. European gas prices. You know what's crucial to see is the UK is a net importer of gas, and so if you like the price of what we're buying from the rest of the world, energy has gone up very significantly relative to the price of what we're selling to the rest of the world. You know, services some goods too, but largely services. So I don't think you need to have a lot of detailed economic intuition to see that if what you're buying from the rest of the world is more expensive relative to what you're selling, you are going to be other things equal, worse off, so this development. This change in the price of what we're buying versus what we're selling that's leaving the UK relative to where it would have been in the past less well off. So the question then arises. Who is going to take that cost? That's a distributional question. That's a question that's not easy for this blunt tool of monetary policy to have a big impact on. So I don't think it's for monetary policy to say, well the cost should be imposed on this person or this group, so we don't have the ability to affect or influence that. But we do care a lot about how that works out, so it's a very natural tendency, a bit reflected in the question here is that if you're seeing higher energy prices, you know that the pie the UK pie is smaller than. Otherwise would be, but what you want to do is try and keep what you get at least the same if not better. The only way you can do that is to have a bigger share of the pie. And the problem is, if everybody simultaneously wants to have a bigger share of the pie, it will no longer add up to 100%. And the only way you can reconcile those greater claims. Those everyone wanting a bigger share of the pie to protect their own spending power, their own incomes in the face of this higher energy prices coming from abroad. The only way that can be reconciled is through higher inflation. So what's key to our sort of thinking about the economy is is not to say it shouldn't. It should be you rather than you who sees higher wages or higher profits or whatever. We and it's very understandable why any individual may ask for a higher wage rise or why any individual firm might right raise its prices in order to protect its profits or pass through costs in order to avoid going bust. And indeed, the whole kind of concept of the market system is that process is leading to more efficiency. More innovation and better incentives for people as individuals and companies to perform better. But what we have as responsibility as the Central Bank is to ensure that this process of trying to shift the cost onto someone else by increasing your share of the pie doesn't become self defeating doesn't lead to this dynamic where everybody tries to avoid taking the cost and as a result inflation becomes embedded begins to spiral and leads to a departure from the target. With the medium term, so our responsibility is not to say you should not have a pay rise. You should not be able to raise prices. You should not be able to maintain profits. It's to ensure that the aggregate picture of all those developments doesn't lead to the inflationary dynamic. Which as I've said is creating a level of instability and volatility that ultimately undermines the productive capacity of the economy. The ability to generate a more prosperous society. We can all benefit the cure to the cost, the real cost. The cost in terms of real spending power coming from higher energy prices in this environment, is to make the UK economy more productive. The way you make the Europe K more economy more productive. Using monetary policy is ultimately to create the stable environment in which long term planning decisions can be made to have more investment and increase. The skills and opportunities for individual workers and create an environment where new initiative firms can thrive so you know, that's the way I see it is, is it's not about us saying you can't have a pay rise. It's saying in order to have the pay rise, it needs to be justified by higher productivity. And we're creating the environment in which you could become more productive. OK, so that's that that's I think that's the useful additional information for your earlier answer. You're talking about looking at a kind of wage setting and price setting is kind of key indicators for how you know how monetary policy is playing out. It's kind of within that that that image of the pie is certainly helped me understand the view that the bank has taken it. So yes, thank you so, and let's move on, and Adam has got a question. Do you think that the end of globalization post COVID will mean we all pay higher prices for goods and services and that in turn it will mean interest rates would be kept higher to slow demand and keep CPI inflation at your 2% target? That's a very good question, and you know my one of my predecessors probably 20 years ago. Maybe longer at a time when I think it's fair to say they were good times. Things were less challenging for the bank he described. The the UK situation is enjoying a nice decade N ICE, which he said was non inflationary continuous expansion so it was like all good things. Now how were we able to have that? Well this process of globalization that you referred to question referred to and the process of technological advance. What was that doing? Well, it's exactly the opposite of what we were facing now. The process of globalization was a process by which the type of things we were buying from the rest of the world. Lots of goods were basically selling services and buying goods by integrating China and India and other emerging markets into the global economy. The price of of of goods which were produced through global supply chains in other parts of the world. It went down. Textile prices fell very rapidly and so forth, so the price of what we were buying went down. The price of what we were selling financial services in the City of London or a business consulting or whatever it might be. They were going up because the increased demand was there coming from. All parts of the world that the the, the the people looking for those types of services was increasing very rapidly. So what we were seeing well the price of goods was going down because we could get cheap textiles from China. Our real spending power was going up because the price of what we were buying was going down relative what was saying that's exactly the mirror image of the situation I I just described that we're facing now. So I think that the question is basically correct. That developments outside developments involving globalization also developments involving technology, and crucially the interaction between those things. The ability through global supply chains to have. Cheaper production offshore. That was a thing from which the UK as a whole, it still had distributional effects a amongst different parts of the UK economy, but for the UK a whole that was growing the pie. And in the growing the pie environment, everyone could be better off, even though some people took a smaller share. Right, so we are no longer in that environment. It's moving from that environment where what we're buying is going down relative to what we're selling to an environment. What we're buying goes up relative to what we're selling in terms of price that that's now leading from a growing pie. Other things equal to a shrinking pie. Other things equal, that's increasing the tension and creating the risk for inflation. So you know, I think it's right to say that. Under the environment we're in now relative to the environment we faced before the the the scope for the risk of this self defeating dynamic, where everybody's trying to maintain their income by broadening their share is greater. The pressure was actually in the opposite direction 20 years ago, and that means, probably monetary policy does need to be tighter in order to avoid the emergence of these. This drift away from the 2% inflation target that I think is so crucial and and actually that's just something that I keep. What would be your kind of 1 sentence explanation of monetary policy being tighter? What does that mean? Well, I mean, I think in practice right now it means higher interest rates and it just means that the tool we have. The right way to think about the Bank of England and what the MPC at the bank is doing is by moving interest rates up and down it's pulling a lever which is either trying to speed the economy up a little bit, expand, demand a little bit, or it's trying to restrain the economy and pull the economy back a little bit. And always what we're trying to do is have that pushing the economy forward, boosting demand such that it's in line with the evolution of the capacity of the economy to produce. Because it's that ability to steer demand in the economy. Broadly speaking, in line with supply of economy, this is a very inexact science, but nonetheless attempting to do that, keeping that balance between demand and supply that is leading to an evolution of prices that's consistent with our target. So I mean, when you put it like that, it sounds very trivial. It doesn't feel very trivial when you're faced with the challenges we face today, but I think the bank is just a machine for accelerating the economy or restraining the economy in terms of the demand conditions using interest rates. And then, fundamentally, behind that, the concept of monetary policy. OK, great. I love. I love a really helpful metaphor though. Thank you. OK, we've got about 5 more minutes to take questions, so here is 1 from Alex from Gloucester, Gloucestershire. Who says the bank has come in for heavy criticism for not reacting sooner to the current inflation? Does the bank regret not acting more aggressively by raising rates faster like the US Central Bank did? Well, hindsight is a wonderful thing and it's always dangerous. I think to sort of. Relive experiences, though. You knew how things were going to turn out. So I mean, given inflation is too high, I think there is a case we'll be saying if we had the world over again, would we have done things differently? Let me just first of all say and I'm, you know, I'm threatening to repeat something I said earlier is. I think you have to be careful about saying we could have avoided today's inflation if only we'd moved interest rates earlier, because the key reason why today's inflation is so high is because energy prices have risen and those rises in energy prices have basically taken place since October, November last year. Now, as I said earlier, this lever that we're pulling the monetary policy lever, we shift it today, but it only has an impact on inflation. 18 months, two years down the road. So as soon as we saw the rise in energy prices. We began to move that lever. Energy prices were going up. We're concerned about the becoming embedded. We tightened monetary policy so we tightened monetary policy starting last December as this rise in energy policies, energy prices began to kick in in order to constrain this potential for the persistent dynamic to emerge. But the trouble is what we've done is only going to have effect at the end of 2023. And in the meantime, the impact of those higher energy prices has fed through into UK inflation much more quickly. So that sounds like an excuse. It's not intended to be an excuse, although I think it does sound like an excuse. It's intended to be a description explaining why we're not able to move inflation. Sorry, control inflation at very high frequency. Now, Alex might say we have a. Why didn't you move interest rates two years before, so back in 2020, before the energy prices rise? Well, I think there's two possible explanations, which are kind of consistent with that. One is remember in the autumn of 2020 we were going into the second lockdown. It didn't seem like the appropriate time to try and put the brakes on the economy. Slow the economy down to keep inflation down. In fact, if anything, inflation was too low. At that point, the low target and the second thing is is that we would have had to have perfect foresight that in two years time and energy prices are going to rise. But back in November 2020. I mean, I was not at the bank at that time, so I back in November 2020. I don't think people were talking about Russia invading Ukraine. I don't think people were envisaging that gas prices were going to go from levels. Around 30 or 40 prints per therm. That's how we measure gaspra 30 or to the level of 400 pence per therm that they've reached now. So you know, I think The thing is, is that, yeah, we could have moved a month earlier, or a month later. We could have done 50 basis points instead of 25 basis points one month or another. So you know, you can always have that sort of at the margin view. That's like a little movements about your shivering hand when you're holding the monetary policy lever, but I I don't want to sound like we got everything right. We can learn we can do better. We're striving to do that, but I think big picture the idea that somehow it was easy thing and we were just two years too late. I just don't think that's probably the right way to think about it now, compared with the US. I mean, that's a that's a sort of another level. I mean, we moved earlier than the US. the US has moved later than faster. Right, so I'm not sure whether you want to be early and steady or late and fast. History will tell. But it's also the case that the situation in the US is a bit different from us, so a lot of what I've said to you and the emphasis I've put on rises in gas prices, external prices that eating into the British pie, the UK economy pie is smaller than otherwise would be. That's because we import energy, so we'll buy what we're buying from the rest of the world in net. One thing we buy from the rest of the world is energy, and the price of that has gone up. the US doesn't buy energy in there from the rest of the world is basically balanced, and what's crucial is gas in the US. It's cheap because you know they have fracking and so forth, and there's no pipeline bringing gas from the US to Europe, so prices of gas in the US have remained pretty low. So the reason why US inflation has risen, I think is quite fundamentally different from why UK inflation has risen, and crucially, US inflation has risen in an environment which isn't so much associated with the shrinking of the pie, whereas inflation in Europe more generally including in Britain, is inflation that's associated with the shrinking of the pie. So the threat of this sort of everyone trying to maintain their income by increasing the share of the pie and that becoming self defeating and leading to inflation is much more acute in Britain and in Europe more widely than it is in the US, because I think the US story is more a story of. Demand running very very strong. You know, the US approached the the effects of the pandemic differently. It cut taxes. It gave people subsidies to go and buy things. They went and bought a lot of things. Lots of demand, not so much supply. That poor price is up. What they need to do is bring demand back. That means pulling the the the stick of monetary policy onto the braking side, whereas for us on the one hand, yes we need to do a bit of breaking as inflation is running too fast. But we also have to be cautious that if we break too hard. We shrink the pipe further and exacerbate some of these pressures to those things. So for us it's much more trying to get a balance between too much and too little. We're in the US, it's perhaps more a little bit of a of a different story, so both from the timing point of view and the comparison point of view. I mean, I don't want to say we can't learn from others, and we couldn't have done better. I think we can always learn, and we could always do better, but I would push back a little bit to think that it's it's. It's obvious that we got things totally wrong. OK, well that's really that's a really interesting description of of some of those differences, right? I kind of hesitate to do this, but let's go for it. And we we only got literally about 3 minutes and and it's introducing a slightly new topic, but so our last question is going to be what impact did QE had on inflation, and what are the future plans for QE? But could you please start with a brief explanation of what QE is? Security is is an additional. I mean, I've emphasized a lot of talking about much about interest rates and you know where we are now is. We're implementing monetary policy through moving interest rates up and down. That's been the center part of our conversation. You know there are difficulties that the bank faced in the past of moving interest rates, because if you could hold bank notes you could hold cash, which gives you a zero return. Then why would you ever hold something if interest rates were negative which was imposing the cost of holding it through negative interest rates. So there is a so-called lower bound on interest rates. You can't push them easily below 0 release below some level, so the bank felt a few years ago that it needed to ease monetary policy despite being unable to lower interest rates. Below the lower bound and the way it did, it was so-called quantitative easing. What that meant was it created money. And of course one of the great things about being a central bank is that you can create money out of nothing and it used that money to go and buy. Financial assets, basically British government bonds, and in so far as it did that injected money in the economy. And this was another way of if you like pushing the monetary policy lever into a expansionary mode. So it was, it was an alternative way of easing monetary policy to lowering interest rates when lowering interest rates, because now what has it done? Has it created inflation? Well, I think it has led it has supported the economy and it it was designed to support the economy at a time when the economy needed support because of everything. The the the demand was too weak relative to supply and the threat then seems a long time ago, but the threat then was the inflation would go too low. So I think QE did create some inflation, but that was to prevent inflation going too low. That was exactly what it was designed to do. The good news is, is that QE did its job. Now of course the problem is that inflation hasn't got just back to our 2% target, but for the reasons we've been discussing, it's overshot on the other side. So clearly that environment you no longer want to be using QE to stimulate the economy. In fact, what you want to do is tighten monetary policy. By raising interest rates, that's been the bulk of what we've discussed today, but probably in parallel. We also want to take some money out of the economy so you know, reverse the process of quantitative easing, and that's what the bank has been doing since the February of this year, when those government bonds that it held have matured. So they, you know, reached their maturity date. The bank hasn't been reinvesting in other bonds, and therefore when the bond matures. It takes the money out of the system that was used to buy those bonds, and we're considering now whether we'll actually go further and sell bonds, not just wait for them to mature. And if we sell bonds, of course when we sell them, people give us money and we'll keep that money in essentially destroy that money. So we're entering a phase of quantitative tightening, which is sort of the opposite of quantitative easing, and that's a parallel process to raising interest rates, both of which are intended to tighten monetary policy to weigh against the threat that inflation. Overshoots and becomes embedded and all that stuff we've talked about at length and gets us back to the 2% target. So I think you know we have moved away from quantitative easing quantitive easing did its job. The world has moved on and now we're going through a different environment. An environment of having to tighten monetary policy. Get back to target. It's not to say we won't be in some point in the future back where we were needing to ease policy and quantum easing will come back, but I don't really foresee that for the. For the next few years at least. Great, well that's a really nice my the last metaphor we've got to end on a very simple image of of putting money in and taking money out. So thank you well and thank you so much, Huw. I feel that that has been like just personally I feel like I've learned a lot from listening to you, and I hope the audience feels the same. And thank you all so much for some really excellent questions that I think really helped us kind of dig in some detail into kind of the situation that the UK. Economy is facing at the moment and I'm sorry that we didn't get through all of your questions. But do you do you think about signing up for the Bank's Citizen Forum and the going online to the economy hub and the discussion and questions can very much continue there. So thank you very much everyone. Thanks for being with us today. Thank you very much and thank you Juliette for your help today.

This page was last updated 29 December 2023