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Governor of the Bank of England Sir Edward George
Governor of the Bank of England Sir Edward George

Please note "BBC Breakfast with Frost" must be credited if any part of this transcript is used

DAVID FROST: And now as we promised Sir Edward George is here with us from the Governor of the Bank of England to talk about the economic situation we face. Good morning and welcome.

EDDIE GEORGE: Morning David.

DAVID FROST: First of all everyone was talking before this terrible event about the fact that the global economy was getting weaker, that there was a danger of world recession, there's a danger of that world recession coming here too, and so on, has that situation got more serious in the last two weeks?

EDDIE GEORGE: Oh I think undoubtedly, I mean these tragic developments couldn't have happened at a worse time. I think before the events of the 11th September the perception which was very shared certainly among my central banking colleagues was that we were around the bottom, we'd seen an extremely sharp slow-down in the rate of growth in the United States, we had to see that slow-down because actually it was unsustainable in the first half of last year. It had been sharp, I think not sharper than had been anticipated and we were somewhere around the bottom and I think we were all looking forward towards a very gradual pick-up as we went into next year. Of course that had had an impact on the rest of the world, more on the Euro zone perhaps than in the United Kingdom but certainly we weren't immune. We had been acting to sustain domestic demand in the United Kingdom to offset what was happening internationally and that had held up perhaps better than in some other countries. But that was how it was on the...

DAVID FROST: September the 10th...

EDDIE GEORGE: Absolutely, then you had these events and of course they had an absolutely immediate impact on sentiment, it was shock and for a couple of days people simply didn't go into the shops and you saw a very dramatic decline, really on the Wednesday and the Thursday. That shock was really on the very high frequency data that we see for the United States and in this country, was beginning to be overcome by the end of the week and into the weekend. So I think some of the numbers that you see with, during that week there was a 30 per cent fall in retail sales, I think that's an exaggeration and one's got to keep it in perspective and not extrapolate...

DAVID FROST: It might have been true the first week but not this past week?

EDDIE GEORGE: Well I think it was true particularly on the first two days and I think, you know people have referred to the kind of television commentary factor, that people were actually staying at home and watching this thing. I think it affected some parts of the property market, both in the United States and here, and in continental Europe, that was the kind of shock effect and of course you had financial market effects, particularly the impact on equity prices. I think hopefully some of that we are now getting through and...

DAVID FROST: Would you think on equity prices, would you hope that there might be a, something of a comeback tomorrow when the markets, because it does seem as though the markets had reacted a little indiscriminately, I mean house prices may be affected, airlines are affected, but across the board was almost affected?

EDDIE GEORGE: I think that was true to begin with, I think through the last ten days we've actually seen more discrimination identifying particular sectors which are likely to be more severely affected than others. But nevertheless we've seen a continued sharp fall in equity prices all over the world. I think on Friday at the end of last week you were seeing particular volatility, I mean at times the market was going up as well as down and it ended up compared with the low points during the course of the day, I think that volatility reflected the nervousness about what is going to be the military response and that's the next kind of real concern. I think people wanted to go into the weekend positioned against the possibility that the military action would actually start during the course of the weekend. But I think that volatility of indices as a whole does suggest that perhaps the market's now trying to find a level.

DAVID FROST: Do you think that these upcoming military movements and so on, and whether it's bombing or whatever it is, will trigger off a new, a new crisis in the stockmarket, a new crisis of confidence, a new crisis of consumer confidence?

EDDIE GEORGE: I think it does depend very much on the form that it takes and the reactions that we see around the world, I think obviously an important factor will be what it does to oil prices and on the whole that's been very encouraging, I think Opec is meeting again next week but up until now it's absolutely stuck to its commitment to try to stabilise the oil prices within the band that it's been seeing. So although you saw a brief spike in the wake of the immediate shock, actually oil prices have been kind of moderating over the rest of the period so that I think you've got to look at the potential impacts in these kind of phases and not sort of extrapolate the extreme nervousness after the events and not extrapolate what's been happening to equity prices. You do need to have rather calm nerves and look at these things in a considered way.

DAVID FROST: And do you think on the basis of what we know now, do you think that we can avoid recession in this country?

EDDIE GEORGE: Well it's obviously too soon to say, I think the overall impression that one has at this stage is that we will see some weakening during the current quarter, perhaps in the next quarter but looking beyond that situation it's very difficult to see what's changed fundamentally and under-pining it is the very decisive action that's been taken, not just in the United States but particularly in the United States in response to their earlier slowdown, monetary policy action and fiscal relaxation, that followed up by action elsewhere earlier in the case of the UK, but coming through to the rest of the world and of course we all reacted after the events of the, September the 10th [sic], so that there are reasons for thinking that if you look beyond the kind of short-term then there's no reason to think that the world is going into a really serious decline. But frankly it's too soon to tell about the kind of short-run impact. This country right up until the kind of latest data was rather, holding up rather better, domestic demand was holding up rather better than elsewhere and that's why it was appropriate for us to make a moderate move after the, the shock. And I think that's still the case but I think all of us are watching really intensively and we will take further action if we conclude that that's necessary in the light of what we see as we come to learn more about what the impact is.

DAVID FROST: Do you think we, we should expect further pressure on the pound, that the value of the pound may come down a bit?

EDDIE GEORGE: Well it has actually edged down, the Euro has recovered against the dollar and in that context we've eased against the Euro, strengthened a bit against the dollar, easing a little bit overall since the shock but before that it had been a real problem for us that the pound had been so strong against the weak Euro so that to the extent that there were to be a further easing, that would actually be welcome to us because our problem has been the imbalance between the international factors, both the exchange rate and the weakening of global demand which had been dampening the UK economy which we'd been having to compensate for by stimulating domestic demand and actually domestic demands hold up pretty well which is why we haven't slowed as much as everyone else so far.

DAVID FROST: And what, what would be your criteria Eddie, in terms of when you look with your committee at whether there should be a further interest rate cut, what, what will your judgement be based on?

EDDIE GEORGE: Well we will be, I mean we look at a whole raft of information both about the international economy and all aspects of the domestic economy and we'll be doing that, we'll be doing that next Friday, we'll have a presentation from staff and then our meeting will begin on the Wednesday after that. We will be looking to see what's, what's happening in terms of the immediate impact, by then I think we may see a little bit more stability than those first few terrible days, we will be looking to see what the impact over the next quarter or two is but we'll also be looking to see what the impact is further out because monetary policy action really takes about two years to have its full effect, so we have to look at all of that.

DAVID FROST: Thank you very much for that very clear answer, all those clear answers. We'll just get a quick update on the news headlines from Emma, Emma Howard.


DAVID FROST: Thank you very much Emma, and thank you to all our guests, to Eddie George, thank you very much indeed for being with us, and to all our guests around the world our thanks to them as well, that's all we've got time for this morning, we'll be back next week same time, same spot on the dial, until then top of the morning, good morning.


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