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Breakfast with Frost
BBC Breakfast with Frost interview with Sir Edward George, Governor of the Bank of England 22 June, 2003

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

Sir Edward George
Difficult to assess what would be the right exchange rate
DAVID FROST: First of all, I want to welcome Sir Edward here - Eddie, top of the morning, good morning.

EDWARD GEORGE: Good morning David.

DAVID FROST: You said many times during the last ten years that our great enemy is inflation but is it still as much of an enemy or is it no longer quite the enemy it was or have we scotched the snake, not killed it?

EDWARD GEORGE: Well I think, I mean certainly when I started the enemy was inflation, because that's what we'd experienced and we'd suffered from that. I think what perhaps I really should have been saying all along, and certainly what everybody I think now believes, is that it's stability of prices, consistently low inflation rather than the threat of upside inflation compared with the threat of falling prices. I mean it's stability that we're seeking throughout. And I think people misunderstood that inflation, they saw controlling inflation as being an end in itself. I don't think it was ever, in my mind, and end in itself. Stability, as a necessary condition for sustainable growth was really the perception and that is stability of prices, consistently low inflation over time.

DAVID FROST: Is deflation a potential enemy around the world at this moment? People point to Japan and so on, do you fear the possibility of deflation?

EDWARD GEORGE: No I think, you know, it has been a real problem in Japan and indeed continues to be a problem in Japan, they haven't dug themselves out of that. I think there's a risk, there's always risks on both sides in anything to do with economics, but I think the risk is very small in the eurozone and even smaller in the United States and in this country. But I think it's right that people should consistently consider how you would handle the downside scenarios just as how you would handle the upside scenarios. I think that's what's actually happening now in policy circles, certainly central banking circles.

DAVID FROST: And what about the headlines which continued today about Peter Hain and so on, this idea that we've had all over the front pages for the last two or three days about the idea of soaking the rich and increasing higher rates of income tax and so on? Attractive as that may seem on a platform or whatever, is that invariably counterproductive?

EDWARD GEORGE: Well I mean you really have to ask politicians about that because what you're looking at is the social desirability of poor people having the capacity to live in a reasonable way and I think everybody approves of that. On the other side, if carried too far, you know tax and spend, then that can have damaging economic consequences and politicians really have to trade off these two objectives. Happily central bankers don't get drawn into that kind of political trade off because I would find that infinitely more difficult than the technical job that we do, which is to deliver consistently low inflation or stability at the macroeconomic level.

DAVID FROST: And on the euro, did you at any stage from the time when Gordon Brown announced his five tests and came through with his announcement last month, did you at any time expect him to come out with a yes - to come out with all five tests being fulfilled - or was it a foregone conclusion that the first time, at least, we wouldn't pass?

EDWARD GEORGE: I have to say I would have been quite surprised if he'd come through with a straightforward yes and, you know, the tests are met and let's go forward to a referendum, because I do think it's an extremely balanced, complicated judgement that's being made. I think the real benefit of the assessment is that it has been, as I would have expected by the Treasury, it has been done in a highly professional way. I think it is balanced. I think it will now, once people have had the chance to absorb it - and there is a great deal to absorb - but once they've had the chance to absorb it, I think that thinking people will actually engage in a more balanced, less polarised debate than we've seen up until now. So I think it's made a great contribution to the debate but I'm not surprised at the immediate result.

DAVID FROST: And with four out of five still to be passed, what's the most difficult?

EDWARD GEORGE: Well I think, you know, within the four that are still to be passed, it is convergence and it is flexibility. I mean they go together. They are set as individual tests but I think actually they're integrated in fact, and these are different perspectives but it's convergence and flexibility rather than investment and the direct impact on the labour market - but they're all interconnected.

DAVID FROST: And the rate at the moment, between the pound - assuming the other things were working, were passed - the rate between the pound and the euro as of today, is that comfortable, is that sustainable?

EDWARD GEORGE: Well it's a lot better than it was a year ago. I mean a year ago I talked in terms of the exchange rate being an immediate obstacle. It's incredible kind of art to know exactly what's an acceptable sustainable exchange rate but the euro has recovered, not just against the pound but against the dollar, and I think that is an exchange rate which is certainly closer to an acceptable rate. I wouldn't like at this stage to make a judgement as to whether it's acceptable but it's certainly moved in the right direction.

DAVID FROST: Does the fact that the problems that Germany are having, one of the side products of that, is it true to say that it is looking more and more difficult to have one interest rate for 15 or even 25 countries?

EDWARD GEORGE: Well one interest rate, even for one country, I think can produce tensions at the regional level if you've got different kind of regional structures of activity so it's a degree question. I think the tensions between regions or countries can actually increase, particularly when the economy as a whole is growing rather slowly and so I think you're seeing quite significant differences between the ideal monetary policy for Germany which would, I think, be for lower interest rates, and the ideal monetary policy for some of the other countries where perhaps they would need to be a bit restrained.

DAVID FROST: Yes.

EDWARD GEORGE: But it does fluctuate over the cycle.

DAVID FROST: Yes. One side not getting all. You've warned about the problems with unsustainable rises in house prices, although they do seem to sustain or have sustained longer than one would have expected and so on, but with first time buyers dropping away, is that something that's, that's going to accelerate, do you think, or is there anything we can really do about it?

EDWARD GEORGE: No what we described, I described as unsustainable was the rate of increase in house prices, which was 25% -

DAVID FROST: The rate of increase, yes 21 per cent in the year to May.

EDWARD GEORGE: - and that is beginning to moderate. And we've talked very carefully about a moderation in the rate of increase. I don't think we think there's a real risk of a crash, a fall in the level of house prices across the country as a whole. I think there has to be always, cows can always fly but we think that quite unlikely, but we do see a continued moderation to a stabilisation, possibly, over the next couple of years in the housing market. And that means that in some parts of the country, in some sectors of the market prices may actually come down - high value houses in London, people say already that's happening. But across the country as a whole it's moderation in the rate of growth towards stability which I think we're looking for.

DAVID FROST: And as you look ahead now, do you see calmer waters ahead? You were quoted as saying that, is that right?

EDWARD GEORGE: Yes, well I do. I mean we've been now, for the last two or three years, struggling between what I call the Charybdis of external weakness which has been sucking us down that way and the potential for unsustainable consumer spending growth which we've been encouraging, certainly accepting, in order to keep us in the middle between the Charybdis and the Scylla. It's taken us longer, I must say, to get through that rather narrow passage and the global economy has remained weaker for longer and has suffered a succession of unexpected setbacks - I think the Iraq war was the latest. It looks to me as if we're through that and I very much hope we're not going to get another unexpected setback and if we don't then I think the external situation will improve, the pattern of exchange rates, certainly has already improved - we touched on that - and I think there will be a moderation in the rate of growth of consumer spending, which we were depending upon in order to keep the economy moving forward at all. Over what time span, over the next year or so, I would expect to see the economy growing at a round trend but with better balanced growth, which means more sustainable growth, and inflation staying around target - so that's not a bad prospect.

DAVID FROST: Well it's a great joy to talk like this, I'm glad we're going to have a further chat a bit later on, but a joy to talk, as we move on - are you going to write your autobiography?

EDWARD GEORGE: Certainly not. Well if I do it will be a private book for my family.


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