Order. Order. Welcome to the Treasury Select Committee on Wednesday the 20th of May, 2026. Today we've got one of our regular sessions with the Bank of England, particularly relating of course to the Monetary Policy Committee's last decision which was on the 26th of April where the decision overall was to hold interest rates at 3.75%.
And so I wanted to welcome our witnesses. We have of course Andrew Bailey the Governor of the Bank of England joined by Sarah Breeden the Deputy Governor whose particular focus is on financial stability at the Bank of England. Dr. Swati Dhingra who's one of the external members of the Monetary Policy Committee and Dr. Catherine Mann also an external member of the Monetary Policy Committee. So very warm welcome to you all.
I think probably you know it's pretty clear about the decision to hold and thank you for your thoughts on that you've provided us or provided the nation on that but obviously the big issue in town is what's happening in Iran and the Middle East. And I really just wanted to get a quick sense from each of you about whether that really was the main reason that you may hold and what your concerns are about the long-lasting impact of the situation in the Middle East on inflation. Perhaps I'll start with you, Governor.
Yes. Well, I was looking back actually because I sort of forgotten that the last time we were here was 4 days before it began and none of us I think at that hearing certainly had any idea what was going to happen. So it really has of course been the dominating change in the landscape since then. And it's interesting you know you may have seen obviously we had an inflation number out this morning and I remember back to the hearing we had then when I was saying well I thought it was today that we would actually be back around target and I think actually everything we've seen since including today's number actually sort of justifies that judgment.
Unfortunately obviously we've had events since then which have changed the picture. We're also in a world which of course is very unpredictable and uncertain in that sense. And I, you know, the way I look at it is that there are sort of three starting things that really sort of condition our judgment on this. One is how long is it going to go on for? Two, whenever it does stop, what is the lasting damage that's been done to the energy supply infrastructure and how long is it going to take to put it back in place? And then the third and by the way neither of those two are things obviously we can influence but they have an impact on the third one which is the one that obviously we can which is what are going to be the what we tend to call the second round effects of all of this in terms of the inflation picture and that depends on a number of things on depends on obviously on those two things on the impact it also depends upon as I'm sure we'll come on to the sort of the condition of the economy and the context in which we're operating and that's really the framework for myself that's the framework of judgment that we you know we're operating in.
Now what I would say is this that I think you know the judgment you reach and the judgment we reached back at the end of April obviously where you get to depends on where you start as it were. As I've said certainly at the last hearing and may have said at a previous one as well it was certainly my yeah it was a reasonable expectation prior to this all happening that we would probably cut once or twice this year and the market was pricing that now the market isn't pricing that now I think effectively that was taken off the table and it was really taken off the table I think with the March decision quite reasonably so if you start there then you know effectively we've tightened policy because we've removed the expectation of a cut before you start talking about what might happen next.
And you can see that by the way obviously in the way the curve has moved. You can see in mortgage rates I mean the increase in mortgage rates for instance. Now that that therefore that tightening I think also gives us I think some some time to assess and so the the whole decision for me is also reflective of that point. Yeah. Very high uncertainty, very high unpredictability. But I think the fact that you we start in this position, we start in a position where no doubt we'll come on to I think we you've got a somewhat softening picture for growth, we've got a somewhat softening picture for the labor market, none of which is really inconsistent with what we were talking about last time we were here actually. Is the context. So I think you know a whole decision was appropriate at that at this point.
Okay. Dr. Mann. I mean, you had some interesting things to say in the minutes about your position being an active hold position. What do you mean by that and what are your thoughts on why can you just expand a bit on why you voted to hold and the impact on?
So, my strategy for monetary policy decision-making all along has been activist. Now activist can either mean moving in 50 basis point or more increments which I have done both up and down at various times over the last five years. But it also means you can hold for longer. And that is also something that I have done even as there have been other parts of the members of the committee that have moved at in a 25 basis point increment.
So what am I looking for now and what are my concerns with respect to the issues on labor market slack and pricing power going into prior to the Middle East conflict developing. I had thought well I will be close to a position where labor market slack might in fact be sufficiently in evidence as to reduce demand for goods and services that would limit the pricing power of firms and that would that was where I was last time with a hold or two times ago last time the the last most recent meeting where where do I sit that's slightly different.
The first point is that on firms pricing strategies in the face of a common shock which this energy price has been a common shock, firms do tend to pass it through to a greater degree on the upside and not so much on the downside. So there's both a pass through as well as an asymmetry with regards to ups and downs. And I thought that was important to consider possible moves going forward.
The second issue though is importantly on what the dynamics for inflation look like in the second half of this year. Why is that particularly important? In the past I have not been as concerned or at least in last two years not as concerned about the labor market. Yes, it was softening. Yes, wages were coming down. We're becoming more closer to what we would consider target consistent. However, if it is also the case that inflation expectations play a very important role in wage setting and wage setting is going sort of there's a seasonality in wage setting. We kind of had some in April and that was relatively soft because of course inflation had been coming down at that time.
But when I look into 2027 and the possibility that the wage bargaining in the first quarter of 2027 is going to be on the back of a high relatively high inflation prospects for the second half of this year. That is something that makes me worry about an embedding of both the cost structure for firms and their price setting as well as inflation expectations and inflation outturns in the second half of the year becoming embedded in wage developments for next year. And so that puts me in the position of looking at those two elements going forward particularly of a concern against that. However, I have to acknowledge that financial conditions have tightened dramatically.
And that plays an important role in the transmission of a hold or whatever the committee decides to do. It's against this landscape of the broad set of financial conditions and we have to take that into account or I have to take that into account in making my decisions going forward.
Thank you. That's very helpful. Dr. Dhingra.
I can explain my decision particularly with respect to how I was voting in February. I think had we been in that position that the Middle East crisis had not happened, I would have felt fairly secure in terms of the way the nominal dynamics were going in terms of the weakness in the real economy which meant we weren't going to see another flare up in any near time in any sort of near term and also compared to say some of the peer European countries which look very similar in terms of wage inflation or services inflation we didn't see that kind of despite low much lower rates there we weren't seeing any kind of derailing of disinflation that we were seeing.
Yeah, I think of course all of that now has to be completely revised because I would say probably some of my worst case scenarios have unfolded or are looking like they might unfold and unfortunately I don't know how to put probabilities on these events whether we will be in a scenario A according to the MPR or whether we'll be in a scenario C. I think one thing is pretty clear which is there is a lot of tightening already in the system at 3.75. We're clearly you know even by the most generous estimates I don't which I don't find necessarily particularly credible that we're really restrictive at this point and the economy looks weak enough that it doesn't look like we we're going to see some kind of consumption-led boom at the moment.
So I think given all of that setting it looks like there is enough in the system out there that even if we see somewhat of a scenario B unfolding we should be able to control inflation. I'm more worried about the fact that now we are faced with a much sharper policy tradeoff that when inflation happens now and when and if we do need to tighten in a more severe scenario then we are going to have to pay a much higher cost for that and for the obvious reason the economy is in a weaker place. Monetary policy is already tighter than when you know you remember of the 2022 shock. So in that sense there is more sort of uncertainty about which way things would unfold and I think broadly speaking I would say that you know even in a fairly severe scenario we have enough tightness in the system and the economy is in a position where it's normalized compared to where it was in the pandemic that we shouldn't see the disinflation process derailed and you know things would normalize in due course but I can't rule out the possibility that these are twin energy shocks happening at the back of each other which can then have repercussions for where inflation goes and that's why we've got to do our job more you know strictly than before.
Okay. And finally, Sarah Breeden.
Thank you. Like Swati, I found it helpful when thinking about what to do after this shock to have in mind the world that I expected to be in prior to it. At the February monetary policy report I expected inflation to come down to 2% and with wage growth already target consistent and with little signs of pricing power in a weak demand environment I expected inflation to stay there. So with that context and bank rate already restricted, I would have expected to vote for one or two more cuts this year in this environment which is of course as Swati and others have said completely different.
We have seen already a tightening in financial conditions. The yield curve is 60 basis points higher now was in April higher than in February. It's 80 basis points tighter now and as I say that was from an already restrictive policy position. So in a world where we are trying to offset second round effects, I think like Swati just described, we have had sufficient tightening in the conditions that matter for businesses and households to be able to offset those the risk of current risk of second round effects. We do have to be alive to the risk of a bigger shock and that having a bigger impact on second round effects, but I think we're well placed at the moment to be able to judge how that plays out rather than needing to move quickly to do so. But if it does look like we're moving to a prolonged conflict with more meaningful second round effects, obviously we will have to be ready to move swiftly and if necessarily forcefully.
Before I hand over to Mr. Hang, I mean Mr. Governor, you talked about the second point being what is the lasting damage to energy supply infrastructure? Where do you get intelligence about that from? Obviously at that last meeting you probably too soon to get it but given that is a right as you right a very real concern do you get intelligence on that and does that feed into your?
Yes it does. Yes. So we talk to I mean we get it from a number of places. So we talk to people in the industry who are obviously much more expert than we are. I talk a lot to my counterparts in the Gulf countries. I see a lot of them. Saw them yesterday actually. In Saudi Arabia, UAE, Qatar and they're obviously on the ground. They know exactly what's happened. I think the assessment is that, you know, there's been more physical damage to the gas supply infrastructure than the oil supply infrastructure. Oil would take some time because, as we always hear on the news, I mean, you know, there are ships in the wrong place. The whole supply lines have been disturbed.
The Saudis have actually been quite effective. They can't I mean, this does this this can't do everything, but they've been quite effective. They have this one pipeline that goes across Saudi Arabia to the Red Sea. they're using that to its full capacity at the moment. I think it doesn't replace all the lost lost supply by any means. But but I think on in the case of gas and this was particularly the attack on the gas field in Qatar, it has damaged some quite key pieces of the infrastructure which are quite apparently technologically complicated and will take some time to replace.
Okay. So, so when you come to Sarah Breeden, when you come to next week, you'll be considering all this. I was just going to say that intelligence really fed into the design of our scenarios. So scenario A is the one that we usually use based on what the future financial markets are telling us. But given all of that intelligence that we'd got from the range of context that the governor described, we did think it was prudent to put in a different scenario.
I would just add two points. The first thing to say is I mean you know and this is reflected in scenarios. I mean I do think think that the futures curves are pretty benign when you sit sit them alongside what I was just saying about particularly in the gas gas market on the damage to the infrastructure which again was why in the scenarios we yeah we have one we have one scenario that follows it but then we have scenarios that aim off that and I think that's important. On the other hand, I think the important things, this is important in judging it compared to four years ago. This is much more of an oil shock than a gas shock globally.
So there is damage to the gas field. It's a smaller part of the overall global picture. And and that's relevant. It's relevant when you look at for instance the the relative movements in the Ofgem cap. They are much smaller than four years ago. And the reason for that is that far more of it's in oil than gas and gas is a but gas is a bigger part of the UK story.
Okay. Thank you. That's very helpful. You MP.
Thank you. I have a question about your response to potential new data and also new measures. And in our last session we talked about how the government's intervention on say energy bills in terms of fiscal policy had brought down headline CPI. If given that all three scenarios that you've projected have quite a significant output gap, do you think that there is more policy space for such measures that bring down CPI to have a positive impact in terms of your mandate on curbing inflation? Or do you think that they would have bad bad effects in terms of stimulating too much demand?
Look, obviously it's for the government to take those decisions. Not for us. You know we we we we have our tools to in sense to to to do monetary policy and to tackle inflation and we don't sort of consider things that could be done outside our framework. I think that's important. I mean the other thing I would say and I don't want to in any sense sort of therefore decry government look looking at them not but I I do think you know some of the very big measures that were taken in the past admittedly as I've just said you know it was a very different situation in terms of the scale of of the issue but very big fiscal policy measures of course let's be honest I mean they are putting off the issue I mean you the cost comes back to you later so I think you know government is right to sort of think about these measures but they're right to think about them also in that context because yeah eventually this you know this cost does come back.
Purely in terms of the macro impact and you know there may be fiscal and other measures we'll talk about food a bit later in the session and what do you see as the macroeconomic impact of that reduction in CPI in terms of how it affects the output gap and inflation.
Well obviously I mean I think Catherine was referring this to this earlier inflation expectations are an important part of this story and we obviously have seen if you if you go down the rank order because you have household expectations, business expectations and financial market expectations and they've moved pretty much in that order. So the biggest move has been household followed by business followed the lowest has been financial markets. So they are influenced obviously by these things. As I think Swati was saying earlier you were saying you know this is the second energy shock in four years that will that will weigh on households thinking no question about that. So look I mean you know measures I I think there was something announced at prime minister's questions you know a couple of hours ago I think on on the delay in fuel duty I mean they're they're obviously relevant and we will consider them we obviously factor them in now they're announced and they may be relevant to that in inflation expectations formation process for instance okay is anything on.
So from a macroeconomic view I mean we have quite a bit of information in the household cost index of exactly how different deciles in the economy, how their baskets how the prices of the different components of their baskets changed. And at the time when the last shock hit, we were able to evaluate the extent to which the different programs that were put into place at that time would affect different income deciles and and also use that to evaluate the extent to which a change in the overall CPI which of course was a very important feature of the energy price guarantee. Instead of 14% inflation, it was 11%. So we could track how these different programs would percolate through the income deciles. We can do the same type of exercise this time with with a little bit more granularity once it becomes clearer what the programs might look like. And so we would be able to take that into account when making our judgments.
And some of that modeling published as well back in the day.
Yeah. Yeah. It was in it was in the NPR.
Yeah. Yeah. If I could just illustrate this point on energy.
I think the current Ofgem cap is 1641 pounds. The latest market estimate for the next quarter is 1,850. Had there not been government government intervention, I think the estimates of what it would have been at the beginning of 2023 is £4,279. So that gives you a sense of the sort of comparative the comparison.
If I can add a couple of really quick points to that. So just to broaden the question out a bit. So one was we already saw what happened with the interventions that the government did with the monthly inflation number that's come in today which is that many of these administered prices have taken some of the pressure off of the headline inflation. And also if you look at the past energy shock, one of the key reasons we saw this really sharp drop that happened after the really big energy price spike that happened very quickly is because a lot more supply came on the market which in this case was largely driven by the US coming into the LNG market. But more broadly supply side policies are particularly useful in being able to alleviate inflation pressures without putting excess pressure on output.
Thank you. Thank you very much. Chris Coghlan, MP.
Thanks, chair. Governor, you're talking about inflation expectations and do you get any comfort from the fact the NPR report indicates that household and firms inflation expectations have risen in the short run, but only slightly in the long run. And therefore perhaps they're not de-anchored and therefore rates may return to target in the in the medium.
Well, it's an important distinction. You're right to point to it. And the way we interpret it is that short-run inflation expectations are heavily influenced by what inflation is today. So if you ask people what they think inflation is going to be in a year's time that is quite heavily influenced by what they believe in believe inflation to be today. Now as you go further out that's not the case. Hence the distinction and we look at the further out very carefully because you would expect it to be anchored more to the inflation target. Not precisely necessarily but anchored more to it. Yes, you do see that. But we do watch this very carefully.
So, so you are confident that expectations are not de-anchored yet?
No, I don't think they're de-anchored at the moment, but I can tell you we do it is something and I think Catherine was describing it very very well earlier. We do watch very carefully because you know I think there's a tension in here I think which is I said earlier you know we're seeing softening conditions in the real economy but we have because of this energy shock seen an upturn you know quite an upturn particularly as you said in short-run inflation expectations so that's a point of tension I mean which of you know which of the in terms of this point about second round effects that I made which of those two things is going to have more weight in that.
Yeah but I mean the NPR report does note that firms more likely to raise prices in response to inflation. So I mean could this initiate a wage price spiral are you worried that.
Well I I don't think wages of course the other part of this now you know we've seen I think you know continuation as with the numbers that came out on Tuesday we've yesterday we've seen a continued gradual reduction in the increase particularly in private sector wage settlements. I would also say that we have another way into that which is again survey evidence on wage increases. Our own agents always do one at the beginning of the year. They did one at the beginning of the year but that was before any of this started. But we do get the decision makers panel survey. That is actually you know more benign I would say so far but we're going to again have to watch that one very carefully as to what as to what it's showing. The other thing Catherine mentioned is there is a seasonality to wage increases as you were saying Catherine. It means that a lot of the private sector wage settlements have been done this year. So we will yeah you know we will get information but it will be a while before we get information a lot of information on that front.
And and Dr. Mann the how sensitive are we seeing wage growth to unemployment and could I mean could stagflation become a reality? So on your previous question about pricing and and so forth and its relationship to expectations.
One of the things that is an important ingredient in the relationship between wages and prices and and particularly in expectations is what our research has identified as threshold effects. So consumers pay a lot more attention to food and energy. We we know that but it's also when inflation as an aggregate gets above say 3 and a half%. Then there's quite a bit more of attention in general to the inflation process and it starts to look like it gets embedded in price setting by firms because firms increasingly set their prices based on the state of the economy and inflation is one measure of the state of the economy and of course wages tend to get settled as well on the state of the economy including the expectations again I'm concerned on the private sector side for wage setting in the first quarter of next year, which is the seasonality for most of the private sector wage setting.
And some of the research that shows up in the boxes in NPR noted the extent to which certain characteristics of sort of different groups key off of either inflation itself or bargain against expectations is about 80% do. So it's very important for me to be looking at the second half of the year. And the way I can do that, you know, you sort of say, well, how how do you look at the second half of the year? It hasn't happened yet. Again our decision-maker panel has one year ahead price expectations, one year ahead wage prospects and we can track the extent to which firms are pretty good at estimating their future price and wage outturns. And they have been pretty good at that. And so that to me is forward-looking information on which I can make some assessments.
Now with regard to wage settlements and and different groups in the labor market we have to look very carefully below aggregates. Most of the softening in the labor market that we've seen so far is in a couple of categories particularly hospitality retail and in information technology. They account for most of the unemployed numbers. So to me that means that the labor market softening while true is not broad-based in my view that's not broad-based. And when we think about different groups the hospitality and retail have less wage flexibility on the downside because of the approaches to minimum wage. And that just means that to the extent that there's adjustment, it's going to be in some other margin than wages. It could be profit margins. It could be numbers of people. And of course there could be capital labor substitution and productivity enhancements as well.
But it does mean that when we think about the relationship between the labor market and the wages, we really have to get into a much more disaggregated analysis.
And specifically on not being broad-based. Think about hospitality and hospitality one could argue perhaps a lot of that's been driven by you know tax increases national in a low margin industry and perhaps if it you know change shifts to AI could be driving IT sector relative sector would you would you.
Yeah that that that is consistent with my assessment of the of the labor market yes.
Thank you and Andrew Bailey the Roger Bootle at Capital Economics notes that the previous inflation in 2022 was accompanied by a sharp rise in broad money supply. But we're not seeing that this time round. Do you I mean do you take any comfort from the slow growth in money money supply?
Well, I mean we look at it I I look at it regularly. And you're right that if you were basing your decisions on money on the money supply you would not see inflationary pressures. I think it's always sensible though to look at it in the round with other things. So it's one of the things that emphasis and also it's important to look at the stories that lie behind that. But at the moment no it's not as it's not flagging pressure in that sense. No.
Thank you very much Mr. Coghlan. Jim Dixon.
Thank you J Meg. Just turning to some of the household finance issues that are likely to be real a real concern to our constituents that we're already hearing about some of those worries. Perhaps to Mr. Bailey, first, how do you think food and other prices, which are obviously very important to household finances, are likely to be impacted compared for instance to the 2022 fuel price hike.
So I I mean I think they I think it will happen. Today's number actually had a quite surprisingly actually benign food price inflation number. It came down actually which was a little little bit contrary to what we were expecting. I I mean the way I look at it, there is a sort of a sequence of effects in terms of the feed through of an energy price shock. So the first one which we've already seen obviously is is the one that comes through particularly at the pump as it were. So pump prices adjust very quickly for instance. The second one in the UK is where the UK is a bit different and this is why by the way I mean you know today's number looks quite benign but we have to take this into account because this pushes in the opposite direction that the way in which the Ofgem mechanism works means that there is because it's a quarterly reset there is a delayed reaction if you like.
I mean it is going to go up the number that the inflation number that we had this morning reflected the fact the Ofgem cap came down in April. Well now we know it's going to go up in July. In fact we pretty much now know what how much it's going to go up because it's through the observation period. So that's the second one. Third one and this is where we get food is what we tend to call the indirect effect. Now that's in other words where energy is is a component obviously and a contributor to the cost of other products. And honestly, I mean, I think one of the things I learned certainly four years ago was was was just how large an energy share there is in things like processed food production and distribution as well, but including that, you know, so some of it, you know, we're getting up to numbers like 30% of the cost is energy. So obviously therefore energy energy prices do come through.
Now how they come through and when they come through depends upon the business energy supply costs that the producers of food for instance are experiencing. We go around the country a lot. We talk to a lot of companies. So a lot of companies obviously take out energy contracts. They therefore you know hedge to a degree. It depends what the nature of the contract is and it also depends when they reset the contract. I mean, I when I always ask companies, I can tell they're either going to sort of slightly smile at me because they managed to reset their contract just before the increase happened or they're going to look extremely pained because it's they're about to reset their price and you don't know until you talk to businesses which situation they're in, but it will come through. I I I think it's really too early to sort of start. I mean, I see a lot of speculation about what food inflation is going to be later this year. I think it's very hard at this stage to really put any sort of any good figures on the moment.
Perhaps Dr. Dhingra, there was some suggestion from the bank's agency mentioned in the NPR report that we could be looking at food price inflation later in the year of six to 7%. Would that be a figure you'd be expecting might come through?
I think the important thing to keep in mind here is that it's much less it's an order of magnitude almost smaller than the food inflation we saw in the past. So I think that that's really important. What precisely the number would look like is really hard to tell. Even if you were to trace what's happening to say global food prices from where we're going to import things, those are moving in all sorts of directions. So, it's really not, you know, I wouldn't want to hazard a guess on that one. I think what the governor outlined about the sequencing of how these effects work, I think that's something that we should expect to happen in the future and we're very alert to that point that yes, there will be food price inflation and you know we're going to have to think about that.
Thank you. And perhaps for Mr. Bailey again just has there been any contact from the Treasury to discuss with you either for information or on any other basis any steps that they Treasury might be looking to do to intervene around food prices?
I I've I've seen the story particularly earlier today on this. We've had no contact with the Treasury on that. So I'm afraid that's a question you'd have to ask the Treasury.
Would and would any of the would any of the panel wish to comment on whether there are any interventions that the Treasury might undertake particularly around food pricing that might help to reduce the future level of inflation going forward at all?
I'm looking at Dr. Mann because she's not going to comment on any of the interventions, but I will comment on if we compare you go into your grocery store today versus four years ago. You go into the grocery store today and there's the little label matching Aldi or matching Lidl. And four years ago, you did not see that type of competition undertaken in the in the grocery stores. You did see empty shelves, but you didn't see competition where there was, you know, if you want to do comparison shopping, it's right there. You can do it. I mean the big difference.
By the way, going back to Swati's point, was that four years ago, of course Ukraine is a major global food supply and that's a big difference. We're talking about an energy shock here. Four years ago we had the Ukraine war as well.
If I could ask a question about our exposure to the jet fuel market. Most of the, well all the indicators show that the UK is a particularly large importer of jet fuel. Do you think this is likely to have a significant effect on inflation in the UK as compared to other territories?
Well, it obviously affects transport prices. It affects airline prices. That is one of the more volatile components of the services indicator index. I apologize. I don't in any sense pretend to be an expert on this market. But again, going back to I think the chair's question earlier, we do talk to a lot of people about the energy markets. I think you're right that in the sort of rank order of things that you know we're experiencing scarcity, jet fuel actually was sort of probably at the top. But what I've picked up more recently is that I think there has first of all there's been a switching to alternative locations of supply of jet fuel because jet fuel comes from other parts of the world. Secondly, I think that there has been some switch in refining activity to actually refine to produce more jet fuel. So I think I say I don't want to I'm not the expert so I don't want to give false comfort here but my sense is that there are measures being taken globally which are easing that position.
One final question if I may. Just in terms of the length of time for which we're likely to be experiencing the shock that comes from the closure of the Strait of Hormuz, if the closure ended reasonably soon, how long are you as the MPC thinking that the effects from that closure are likely to last going forward?
Yeah. So that's going back to my sort of three parts to the story point. That's the second part. What we're told is this. I think in oil it would be a matter of a number of months. And that's a lot of that is to do with getting the sort of the supply chain back into order as it were, getting the boats in the right place and so on. With gas, I think it's actually longer. It's quite a bit longer than that. It could be a year or two more because of this need to rebuild the infrastructure. But then as Swati I think you were saying earlier, you know there has been more gas supply, LNG, coming onto the market since the shock four years ago. And by the way I should say about oil, I mean we were in a position before any of this started where there was if anything a surplus of supply in the oil market. So if we get back to that point it's a question of how long it takes to your question to get back to that point.
Thank you very much, Mr. Fix Yuan.
Thank you, Chair. I just want to press a bit more on my colleague's line of questioning earlier about the Treasury's measures. And I was wondering if it would be normal for when the Treasury is looking at interventions that change prices, so lowering the cost of living, for them to have that conversation with each of us on your reaction function to different measures or is that not part of the institution?
Well, normally in the sense that we oft I mean obviously if it's part of a budget then there is a sort of process for having those conversations and they would keep us informed. I didn't honestly I didn't know that the prime minister was going to say what he said in prime minister's questions but that's all right. I don't need to know, you know we now know and we'll take it into consideration.
Anyone else want to comment?
I think just long term if you were to think about what that coordination should look like in a world of big supply shocks. I think that's something for parliament to think about.
Taken the hint. Yes, Mr. Grady.
I just last try. One question just and this may be a death question but when I read people like Professor Nick Butler formerly of BP and Professor Birol of the International Energy Agency commentating in the FT they suggest that actually reserves are becoming very tight, that actually we're sailing into one of the biggest energy crises we've ever seen even bigger than Chancellor Healey and your predecessor from the mid-70s. And yet the general discussion here is around 6% inflation. Is there a risk that we're missing the risk of a very significant shock that goes way beyond what you're describing, Governor?
Well, the longer the I think look, let me be honest. The longer this goes on, the more difficult it gets. There's no question about that. Now, I was at the G7 on Monday and Tuesday with the chancellor and the head of the IEA, the International Energy Agency was there. He talked us through his latest thinking. And I think you know the points he's made a number of times that there are obviously drawdowns on the world's reserve supply going on. So the system is in a sense in deficit at the moment and that deficit is being made up by drawing down the world's reserves. I think the point he's made is that it would be I think easy to think if you're not a sort of technician in that market, don't think you can fully draw down the world's oil reserves. I don't think they're all available in that sense because there are various technical reasons why you can't do it. So I think he's I mean sensibly he's a real expert on this. I mean he sensibly introduces a note of caution on this front when he talks about it.
Certainly. Thank you very much Mr. Grady. Derwyn MP.
Thank you chair. Governor you're a noted economic historian. So can you think of any noted I think any dispute that I'm sure but anyway I'll take I have noted it. I just wondered if you could point to any historic examples where the state setting the price of food has been an effective economic intervention.
Um and I'm sure there are many in some countries. Look I think the question you have to think through in this sort of thing is are you doing it for some you know very sort of well-grounded very temporary reason. I think if you start doing it as a matter of course then you effectively you know you're sort of artificially moving prices relative to costs and that's not a sustainable thing in the long run but there may be reasons for doing it in the short run I say but you know it does need to be thought through in that sense.
I just perhaps put the same point to Dr. Dhingra because you've often talked about this in your evidence to us the global chain. How practical is it really possible in the modern world for one government to effectively put price caps or encourage price caps or whatever mechanism they use when it's not all in the control the food supply chain is not in the control of one sovereign nation.
I often get asked this question and I don't have the solutions. I only have a sense of what would be economically logical which is that thinking about where to find these sources of supply when you have a crisis is really key and that's kind of one thing which we can think about doing. A lot of our food is imported which many other countries don't face that problem. On the specific point about price controls, lots of countries have tried it, not necessarily successfully. And the biggest problem with these sorts of controls is you're dampening the price signal precisely what you want people to react to. So as a market economy, you can do that for a little bit, but how long can you let it go on? I grew up with price controls on food all my life. And that story, you know, to some degree was very successful in being able to cure famine and poverty and various things like that. But at the same time, what it's ended up creating is a highly distorted agricultural sector in India. So in that sense, do it with a lot of caution and a lot of thinking behind what it's trying to target. I mean there is of course another area which we're seeing at the moment where I think it's more justified and is being used which is energy where you've got obviously other sources of energy where the cost hasn't changed but energy prices have and I think governments do see that as somewhere where they do take measures and that but that's a different situation because the costs haven't changed.
Dr. Mann did you want to come in on this? I thought that's what you indicated.
I thought Dr. Mann made an interesting point just now about the competitive nature of the supermarkets in the UK. But if I could change the subject completely to another area where the government has intervened and changed the price of something which is the price of employing a young person and that's gone up by about £4,000 a year. And you've seen a huge increase to levels we haven't seen since 2009 in terms of young people who are out of work. And I wondered Dr. Mann if you could share with us how the monetary policy is looking at the labor market statistics at the moment because it's been a problem area. There's been difficulty looking at those statistics. You've not been getting very accurate information from the normal sources and I just wondered if you could share with us how you're thinking about how impacts like that because there's clearly been a loosening of the labor market there are fewer people on payrolls than there were a couple of years ago whether that's something that you're factoring into your decision making and how.
So we've been as you can see from the boxes in the NPR there's quite a bit of research that's being done by the staff using the granular data across different sectors with the wages associated with those sectors, the Beveridge curve and you know the clustered wage analysis. I won't ask you for whether or not you've read all the boxes.
All your forecasts do show unemployment going up don't they including the.
Forecast I mean I think I've said before that when I evaluate the state of the economy. I tend to focus on the granular information that I can get from firms with regard to their pricing strategy, their labor employment strategy, their production prospects, what they believe about demand. And I use that information to judge the state of the economy far more than I use the aggregate data. And it's the aggregate data that go into the forecast. So although that is the forecast that has come out I tend to look at other information that I think is a better indicator of prospects for the economy. And for example one thing that I think is a very important distinction for understanding the behavior of the economy because it has direct impact on employment prospects is the difference between GDP and market sector output. There's been a widening gap between these two different measures of economic activity. It also shows up in terms of employment in the public sector versus employment in the private sector. Last year when there was quite a bit of a deterioration in employment in the private sector, employment in the public sector basically countered that almost entirely. Things have been different towards the end of last year and going into the quarters here. But that type of analysis is to me indicative of what the prospects for the economy are. I might add for wages for example private sector wages at 3.2, 3.5 through DMP through the agents through the various measures of private sector wages, public sector wages at 5.2, the new national minimum wage for 21 and above at 4.1. These types of assessments I find bringing them to bear to my judgment is the way I evaluate the state of the economy.
Thank you. And Sarah Breeden, you were nodding along when I was mentioning about some of the problems with the labor market statistics. Are you comfortable now that you're getting the right kind of information when you're making these decisions about the state of the labor market? And how do you see the softness of the labor market affecting the pass through of inflation into second order effects?
I very much agree with Dr. Mann's comments about needing to get below the aggregate data and understand what's happening in different industries and at different bits of the age distribution and skills distribution. I personally find it incredibly helpful to go out and talk to businesses about what they are actually doing with their hiring intentions. And what's really come through when talking to them is that as people leave, they're not replacing them. Now, that means their productivity levels are going up. That's a good news story, but it is a problem for entry-level jobs or for people coming into the labor market, which I think is the counterpart to your point about youth unemployment. So, we take that into account when we're thinking about what's happening in the economy as a whole. It's not obvious that monetary policy is the only response or indeed the right response to that. But it is a part of our decisions.
Indeed. And Governor, we heard from the chief economist last time about how he empathized with young people because it was something that he was seeing in his own family. And I just wondered what assessment you've made now of the impact that artificial intelligence might be also having in terms of those entry level positions but also how you then take your assessment of the situation for young people entry level positions and how that feeds through in terms of what you need to do on a monetary policy response because of its impact on inflation if any.
Well, artificial intelligence is obviously another essentially supply side change in the economy. I think you can divide it into four parts or at least I tend to lean on this. So the four parts are one obviously it can destroy jobs. In other words remove jobs. So an example of that would be that if you create a chatbot to speak to customers then you will reduce customer service staff. It can create new jobs. So an example of that would be data scientists. If you vastly increase the sort of capacity to analyze data then you'll create the demand to do that by humans because I think a lot of this is humans working with technology. The third one is where it increases productivity and that productivity is essentially shared between sort of machines and humans as it were. So you know if for instance it can process medical analysis a lot more quickly and a lot more of it you can increase the demand for doctors because then you have to do something you obviously you want to act on it. There's a much weaker form of that which is which I think is job negative really where actually it's doing it all and the only employment effect is the sort of the person who's keeping the data center going as it were. So that's the fourth one which is much so there's two rather sort of more positive ones and two frankly negative ones. So really it then comes down to two things. One is obviously what's the balance of those forces. Now you know you mentioned economic history I won't go through this I mean this is what in economic history we tend to call a general purpose technology innovation. So you know you go through steam engines, electricity, internet, ICT. I do think the next one is going to be AI and probably AI and robotics actually in some combination. These are the things that do I think do move productivity growth and this is really important for the economy. But for employment the thing is each of these has had a different effect in terms of employment. There is no you can't generalize across these things. They're different because they're structurally different. And it's down to a, you know, which of those four things the balance of those four things, but then b the sequence of those four things because they can come through at different sequences because general purpose technology innovation historically has taken a long time to come through. It may come through quicker this time because it's obviously moving very quickly as we're seeing in another part of our world at the moment. But you know the classic one is you know it took eight decades between sort of James Watt inventing a steam engine and it coming through in the UK productivity numbers. So you know they are so because they usually require other innovations to make them actually work on site as it were.
But is the monetary policy committee now getting good enough data on the labor market because that was a problem that you pointed to for a long.
I think the ONS is still obviously very much working on it. I think that they have achieved quite a lot actually already and what we have done is actually and my colleagues were talking about this is obviously you know we're great consumers of data so we look around for you know we search for all the data we can get and I would very much echo what Sarah was saying because I'm in the same position I think we're all in the same position that we get very good information by going out on the road as it were with the agents on this one and I think as Sarah was saying you know we are in a much lower turnover labor market at the moment. That's one of the very very clear messages we get that you know people are staying in jobs, they're not leaving jobs. And so this affects to your point about youth unemployment because as Sarah was saying, you know, obviously youth unemployment is particularly affected because it's people who don't have jobs to start with who are coming into the job market and they're going to find it more difficult. Might I add one other thing that I found interesting watching is net desired hours the amount that people want to work more and are unable to do that has risen recently the number of people want to do more hours and I think that is an indication of slack in the labor market and the ability therefore of there being the reduced likelihood of there being pressure on wages that's certainly been something I've.
And Dr. Dhingra on the labor market specifically did you want to add anything to those points?
Yes a couple of points so one is I think the situation has improved both from the fact that the LFS is now available in some form and also from the fact that the way the labor market has turned out to be a lot of these indicators different indicators from different data sources are pointing in the same direction. So that gives us a lot more confidence in thinking that what we're seeing is not an artifact of the data for that month or that quarter. It's much broader than that and that's also taking into account what the deputy governor just said. I think I'll add one more point which is I think it's really important the last point that you raised about youth unemployment and the effects of AI because it seems to be from what the staff have shown us they did some really good analysis showing that youth unemployment seems to be rising globally. Now that could be a cyclical thing which of course is very important for the conduct of monetary policy that to what extent is that purely cyclical phenomenon that you know the people who come in last will be the ones who probably get fired first when the economy is in a weaker position. The IFS has done some very good recent analysis on this which is suggesting that there is a cyclical component but that doesn't seem to be the only story that there seem to be some more structural factors whether that's through health issues but more broadly it doesn't seem to jump out that it's got to do with the minimum wage or with the NICs because you can segregate the workers you're looking at by the age profile that gets really hit by the minimum wage or gets really hit by the NICs for example the 21 year old threshold and you can also look across different regions. Some regions, you know, for example, Southend being the famous one where a lot more people are on the minimum wage as opposed to other regions in the country and you don't necessarily see a strong correlation in fact almost none between unemployment changes that have happened recently and the minimum wage or to that degree even to NICs. But I think it's much more important to have that broader conversation about the extent to which AI or some of these other global phenomena driving what's going on.
I mean that's consistent with the view that AI is taking out more entry-level jobs. So if you take lawyers for instance is taking out the sort of the entry level jobs because they were far more sort of information processing jobs if you like.
So I think I mean I'm going to push back a little bit. You see the differences of views, different level of views in the committee. You get a little taste of what happens around the table. So if you look at our agent reports disaggregated by sector on the effect of different components of minimum wage and so forth, they find that they're saying that there is an impact and so.
Hospitality yes hospitality in particular. So I think that, you know, we this just sort of says more research needs to be done, but to sort of say this is a global phenomenon and the UK is just the same as everybody else, I think is something that needs a lot more consideration. On AI, I think what's interesting is that across the US, the UK, Germany and Australia, a variety of sources research on each one of those elements. More 90% say no impact when you ask firms. So it may be that this manifestation is as the deputy governor said which is we are not going to hire somebody if someone retires. So that's not exactly no impact but it's not like AI is taking a job. It's just that it's allowing a replacement. And the last point I would make about AI is we actually are using AI internally on these agent reports. We have, you know, so they've had an extended many years across all these various regions where we have notes of the different questions we've asked and the responses and so forth. All of that is now in a database and it is queried on questions of particular interest to the committee.
I'm going to move on to one last question of particular interest if I may which is that on the 1st of July the government is bringing in a 50% steel tariff and I wondered if the bank has done any analysis on what the impact might be on the UK economy and on inflation from that 50% steel tariff on the 1st of July and the reduction in quotas and if not if perhaps you could follow up with a letter.
I think we'll follow up with a letter because obviously we've obviously looked at the whole tariff question generally over the last well more than a year now. I haven't looked at steel tariffs.
Is the UK bringing 50% steel tariff on imports of certain grades of steel.
Yeah. Tariffs are certainly jumping around rather at the moment.
Thank you very much Dame Harriet. Chris Coghlan briefly.
