November Inflation Report Treasury Committee post mortem

This morning the Treasury Committee, the cross-party Parliamentary body charged with scrutinising the activities of the Bank, held a hearing on the Bank of England’s November Inflation Report.  It seemed like an anti-climax.  Lots to talk and grill the BoE about, but not much progress made.

There was a lot of jokey chaps humour between Carney and Tyrie [TC chair] and others.  At a time when the economy is not yet out of the woods, with the conventional monetary policy instrument trapped against its natural floor, and with all the other scrutiny the Bank faces on issues of malpractice in the industry, even inside the Bank itself, it doesn’t seem like the time for funny stuff.  This is really the fault of Tyrie and the other TC members for failing to set the right tone, and being unable to resist the temptation to crack clever jokes on TV with the celebrity policymaker.  Pompous though it seems to say it, as I read this back, isn’t this the sort of stuff that turns people off politics?  I suppose that it’s a fairly low risk forum, as only a few hundred BoE watchers will be tuning in.

Committee members bombarded Carney and the others with questions on migration.  These were an abuse of the process.  Members were trying to get the Bank’s officials, who have to study the labour market closely to figure out the appropriate stance of monetary policy, to make comments that could be used in the political debate about whether we should seek to try to renegotiate the EU Treaty to prevent freedom of movement of labour.  But time scrutinising the Bank is scarce, and when there are lots of important things to question them on, and the Bank’s accountability process is stretched – the BoE having so many more important responsibilities these days – it is a great shame to waste Committee time on issues that are not inside the BoEs remit.  Moreover, if the tactic of luring the Bank into political debate had been successful, it would have helped to corrode the Bank’s independence and impede its ability to do its job.  Just the opposite of what the Committee is for.

Kirsten Forbes improvised a cop-out of the migration question to the effect of ‘the academic literature on migration is a complete muddle’ [sic].  I don’t blame her for finding a way to get out of answering.  But I don’t think that is a particularly accurate summary.  I read the literature as arriving at some emerging points of agreement.  For example, the economics 101 prediction that inward migration would significantly lower wages into the markets were migrants compete, seems to have been refuted, highly germain to the false  sense of grievance that is being cultivated around immigration.

I missed Carney’s exact remarks, but read later that he reportedly played down the risk of deflation.   Well, if you buy some of the larger estimates of the biases in CPIs due to new goods bias and the difficulties of adjusting for quality change, as I remarked before, it’s conceivable that we are experiencing deflation now.

Measurement issues aside, I was looking for a good explanation of why a larger forecast undershoot of the target in the November Inflation Report – despite some yield curve softening – warranted no further action to try to loosen.  But if it was there I missed it.  If the economy were starting from steady state, with inflation on target, and interest rates well away from the zero bound, I could understand the MPC being relaxed about a widening 3 year undershoot of the target.  But right now, with rates pressed against what the MPC have decided is its floor of 0.5 per cent, I would expect hyper-sensitivity to any negative news on forecast inflation, and for them to go to excruciating lengths to explain why it is not possible or desirable to do anything about it.

TC members seemed to have been briefed extensively on Danny Blanchflower’s comments on the labour market aspects of the forecast.  One line of questioning was whether the MPCs forecast for real and nominal wage growth wasn’t just a prediction of mean reversion.  Carney managed to close off the questioning by remarking that this was a ‘fair comment’.  But the real point never got made or addressed, indicative of the general air of lethargy on the Committee side of the table.  The substantive point is tricky.  Danny has a point that forecasts of real wage recovery have so far been disappointed.  But then the eyeball econometricians on the Bank side of the table can readily claim that it’s fair to predict that old, average relationships reassert themselves, in this case meaning a return to productivity and real wage growth.

For more on the hearing, read Emily Cadman’s FT story, which cites Rob Wood [another ex BoE economist now at Berrenberg] and myself.

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