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EDITIONS
Breakfast with Frost
Sir Edward George, Governor of the Bank of England
Sir Edward George, Governor of the Bank of England
BBC BREAKFAST WITH FROST
INTERVIEW:
SIR EDWARD GEORGE,
GOVERNOR OF THE BANK OF ENGLAND
NOVEMBER 17TH, 2002

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

DAVID FROST:
House prices are continuing to boom across the country but the Bank of England issued a clear warning to home owners they're heading for a fall - and the longer the boom goes on, the worse the crash could be. Given that the value of our homes is the main feel good factor in the British economy, what will the effect of that be? Could we sink into gloom and more gloom, affecting other major industries? What else is going to happen as well? The man who knows it all, the governor of the Bank of England, Sir Edward George is here. Eddie, good morning.

EDWARD GEORGE:
Good morning David.

DAVID FROST:
Given the difficult situation economically in the world at the moment, how are we doing compared to the rest of the world? How are we doing compared to other countries in Europe and beyond.

EDWARD GEORGE:
Well we were actually one of the very few countries in the world that avoided negative growth during the course of last year. Only just, but nevertheless we managed to keep things moving forward, just about, because you are absolutely right that the key to our current situation is the weakness of the world economy. I think we're past the worst. I think we're seeing in the United States a gradual recovery, growth in the third quarter was three per cent up on the third quarter a year ago, and I think that that gradual progress will continue. I think the prospect in Europe is probably for more modest but positive growth and the prospect in Japan is more uncertain still. So we are in a difficult international environment though I think it's improving. And that's the context for our policy posture in this country, where to offset the weakness of the world economy we've had to actually encourage domestic demand growth. And in this environment that's meant consumption. And inevitably that's meant low interest rates, it's meant an increase in borrowing by the household sector and it's meant this rise in house prices. And that's a concern, if it went too far then we could have problems later on. I think in your introduction you talked about a fall in house prices - what we're actually looking for is not a fall in house prices but a slowdown in the rate of increase, which is quite different.

DAVID FROST:
Yes well I think Mervyn King in his statement said that what you were looking for was a situation where we would go over two years from 30 per cent rises to nought per cent rises. And that's what you'd like to see.

EDWARD GEORGE:
Well yes, I think that's what we think we're likely to see, though there are risks on either side. We may not see a sufficient slowdown or we may see something which goes beyond just a slowdown in the rate of growth. But our central expectation is that we will actually see slower growth in house prices. And we will need to see that, because there's no question of whatever it is - 25, 30 per cent - growth in house prices is not sustainable for very long.

DAVID FROST:
And in fact house prices play a larger part in the British economy than in many other economies, doesn't it?

EDWARD GEORGE:
Yes.

DAVID FROST:
And allied with the fact that we have variable interest rates and so on, it means that it would make life very difficult if we were in the euro at this moment, wanting to adjust our house prices and our interest rates, wouldn't it?

EDWARD GEORGE:
Well, I mean our interest rates would be determined on the basis of the eurozone as a whole, that's certainly true, and it is also true that we have higher home ownership in the United Kingdom and therefore the housing market looms larger. We are moving a little way towards fixed interest mortgages, as they have more generally on the continent. I think over time that's likely to continue. But certainly the impact is not quite the same.

DAVID FROST:
And in terms of growth, do you think that the Treasury will be able to hit those, the figures that were predicted for growth, this year, next year and the year after? Or do we have to expect a slight modification in growth?

EDWARD GEORGE:
Well I think the, compared with the expectation at the time of the budget, not just the Treasury but we ourselves would have expected a stronger global economy and therefore a stronger UK economy. I think we have seen some slowdown - it's not huge - and we think that that will be the case for the current year. We think now we are back growing at a round trend and we expect that to continue.

DAVID FROST:
What about the situation of Germany today? How worrying is that - I mean they're not meeting some of their targets in the EU stability and growth pact and so on and France is a bit close to doing the same thing. I mean, and obviously someone's commented there that Germany's in breach of the rules but they can't take the measures that we could take because we're not in the euro. But I mean it makes it more difficult for Germany to evade this recession, doesn't it?

EDWARD GEORGE:
Well, yes, I think the question is, you know, whether that's not something to do with the form and the manner of application of the stability and growth pact itself. I do think in these circumstances, where domestic demand growth in the eurozone as a whole, but particularly in Germany, is exceptionally weak. It's tremendously important, in fact, that the fiscal situation should be allowed to cushion some of the impact of that so that the automatic stabilisers, the fact that you have lower growth, the fact that you therefore have a larger fiscal deficit, should be allowed to happen. And indeed it is provided for in the stability and growth pact but there are questions of interpretation and I think the interpretation is in danger of being very rigid. I think in this country it's actually helpful that the fiscal deficit will expand as the economy grows more slowly than anticipated, because that's a buffer, if you like. I mean it is an automatic stabiliser which is actually helping to support the UK economy. And I think there is a real question about the interpretation and perhaps the specification of the stability and growth pact in Europe.

DAVID FROST:
So maybe Prodi was right, that some of the rules in the area of the Stability Pact are stupid.

EDWARD GEORGE:
Well, I don't know about stupid but it needs to be looked at again, David, I think.

DAVID FROST:
And what about inflation at the moment? People point out it's gone up a little but it's still below 2.5 per cent. Are you confident about the state of inflation in this country staying below 2.5 per cent?

EDWARD GEORGE:
I think - I mean one of the very helpful things about the economy in this country is that inflationary pressure is under very good control. We are actually seeing it very close to target at the moment, close below. We're going to see it go above target, probably, for the next few months, and it may stay there for most of the rest of next year. That's to do with, basically, oil prices, a year ago compared with now, where they're higher because of Iraq and all of that. It's also the case that the rise in house prices gets fed through in the form of housing depreciation. But those are effectively one off influences rather than sustained upward pressure on inflation. So inflation is under pretty good control, and that's what enables monetary policy to remain supportive of the economy as a whole. So that's not a major issue - I think the recent debate has been more on the downside rather than the upside.

DAVID FROST:
What do you think about - it's almost a year since the Enron scandal broke - what effect has that had on big business world-wide, do you think? I mean has it had a lasting effect?

EDWARD GEORGE:
It's very interesting. I think the corporate governance in accounting failures, really, in the United States, would have caused every company, every accounting firm, certainly in this country, to examine the possibility could it happen here, and nothing very much has transpired. I don't say it couldn't but I just say it hasn't. But nevertheless it impacted confidence in valuations. That impacted confidence in the stock market and that in turn has had a depressing effect on business confidence. And that effect was indiscriminate - it applied right throughout the world. I do think that we possibly have seen greater stability since the end of September, and I very much welcome that because I think that was in danger of actually unhinging the global economic prospect, and that would have affected us.

DAVID FROST:
And what about the effect on inflation and everything else? I mean if the government was - and I know it's not about to do a 40 per cent wage increase for anybody - but if something like a 40 per cent wage increase, or a very high wage increase, went through in something like the firefighters strike, how bad an example would that be for the rest of the economy?

EDWARD GEORGE:
Well, I mean there has to be a real risk that other elements in the public sector, first of all, would say "me too" and I mean that would be very difficult to stop if it were allowed to start. So that, I mean however much sympathy one may have with the conditions of work in different sectors, I think one has to recognise that if we got wage inflation driven by the threat of strike in this way, that would impact the whole of the economy. We would see, not just inflation higher, we would see unemployment higher and I think it would be very damaging indeed. But happily, that's not for central bankers, that's for politicians - and I gather you've got one speaking to you in a moment.

DAVID FROST:
Yes, who's rather involved in this particular subject. But overall your message today would be that because of things improving here and improving slowly in Europe and the three per cent rise in the United States and all of those things, that contrary to the sort of gloom amongst one or two of the papers today, your message is a message of hope today - and indeed, more than hope, a message of confidence.

EDWARD GEORGE:
Yes, absolutely. I think we're going to see modest progress internationally. I think that will be a helpful environment for the UK. I think we will, at some point, need to see a moderation in the rate of growth of consumer spending, hopefully a pick up in business investment, and I think that's quite possible without generating inflationary pressures. I have to say that there are risks and uncertainties around that central expectation but that's the prospect that I see.

DAVID FROST:
And given what you were saying about the Treasury earlier and that, and what you were saying just there, you don't see a danger of a black hole in the middle of our finances?

EDWARD GEORGE:
Oh no, not a serious black hole. I think our finances are in much better shape than most other countries in the world, I think our debt, the GDP ratio in particular, is exceptionally low by international standards. I think the medium and longer term pressures from ageing population - which is common everywhere - they are less in this country. So that, I mean there are kind of tactical questions but I think the Chancellor's got a certain amount of room for manoeuvre and I am sure he will use it sensibly.

DAVID FROST:
Still got some room for manoeuvre.

EDWARD GEORGE:
Absolutely. Yes.

DAVID FROST:
Thank you very much, Eddie, for being with us today.

EDWARD GEORGE:
Thank you too.

DAVID FROST:
We always enjoy your visits, it was a great joy to have you here, as ever.

INTERVIEW ENDS
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