ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS

DERMOT MURNAGHAN: Now Britain’s economic recovery is not only reliant on the Chancellor of course, the Bank of England has also been taking steps to stave off a double-dip recession. The Bank has continued with its quantitative easing programme that’s effectively printing and pumping more money into the economy but have they gone far enough and will it work? Well with me is the Bank of England’s Monetary Policy Committee member, Paul Fisher, and a very good morning to you.

PAUL FISHER: Good morning.

DERMOT MURNAGHAN: Well I mentioned quantitative easing there and you have voted for another £50 billion to be pumped into the economy. There are those that question whether it is effective, they say it stores up problems with inflation, it inflates asset prices and the banks just sit on it and use it to shore up their balance sheets, they don’t lend it.

PAUL FISHER: Well of course the whole intent of quantitative easing is to increase the inflation rate in the medium term. The biggest risk that’s been facing us over the last three years isn’t sustained high inflation, it’s falling back into deep recession and permanent deflation and that’s the sort of risk we’ve been using QE to guard against. Actually the intention was to push inflation up towards the 2% target.

DERMOT MURNAGHAN: Well it’s the point at which it turns, doesn’t it, because inflation of course has been well above that target and that is really your prime directive, your sole remit is to keep it between one and three percent yet you’ve been doing other things, you’re concerning yourselves with growth.

PAUL FISHER: The reason is actually much more complicated than that. What it says is, it acknowledges the possibility that there will be shocks happen which are outside our control which temporarily push inflation up and that’s exactly what’s happened to us over the last few years with oil prices and in those circumstances it is up to us to decide how quickly to bring inflation back to target and that’s why we have the open letter system, to explain to the Chancellor and the public in an open way why we think inflation is temporarily higher, what we’re doing about it and how quickly we expect inflation to come back to target.

DERMOT MURNAGHAN: Do you get a sense though that this is the last batch of quantitative easing or is there the potential for more should the economy still show signs of distress?

PAUL FISHER: I think we have to keep an open mind and certainly I have got an open mind. It’s possible that this will be the end for now, we can decide that over the next few months. We actually decide every month whether or not we want to add to the programme or whether we want to stop but we set out a plan for the next three months at a time so that there is some certainty in the markets about what we are likely to do. So the most likely thing is that we wait until May when we do our next forecast round and make a decision then although we reflect on it all the time since. For me the big question since last October was the risk of the economy slipping back into another recession. We could see the economy weakening through the course of last year, we actually had quite negative growth in fourth quarter. Now at the moment the downside risk from that doesn’t seem to be crystallising, we don’t seem to be continuing to slide down this negative growth and if that’s what it looks like over the next few months, that’ll put more weight on the arguments for stopping than for carrying on but we’ll have to see how it pans out over the next few months.

DERMOT MURNAGHAN: Okay, but I mean 275 billion isn’t it, so far? Is it your contention, the bank’s contention that things would be a lot worse if that had not happened?

PAUL FISHER: Absolutely and you can see quite a number of effects from quantitative easing working through the system in terms of bringing down market interest rates, in terms of making it easier for large scale corporates to go to the capital markets to borrow. Really the effects have been quite powerful but they are not very direct. Monetary policy seldom works very directly so it is quite difficult for people to see how it’s working.

DERMOT MURNAGHAN: There is some collateral damage in all of this, isn’t there, so to speak, in terms of sections of society and the Governor addressed that I see in the last quarterly inflation meeting and it is of course savers because as you say there, you are depressing rates and debt has caused the crisis and it seems savers are paying for it and that’s an unfairness.

PAUL FISHER: Well there are a lot of unfair things have happened. I think you have to start from the fact that we have had the largest global financial crisis ever for reasons which were not totally within our control, a lot of it was international. We have had the biggest fall in output, 7%, in a recession since the Great Depression of the 30s and a lot of people have suffered during that. Some people are unemployed, some people have had their businesses closed, those people in work have seen prices rise faster than wages and savers have seen returns from savings rates go down so a lot of people have suffered, not just savers. As a nation we are around 10% or so worse off than we would have been if output had kept on growing at its normal rate, so there is a lot of suffering going round. In fact QE doesn’t necessarily penalise pensioners in the way that people assume because one of the things we are trying to do is boost the prices of risky assets, equities, corporate bonds and so on, which form part of the pension pot. So although there are effectively interest rates down, there’s also an effect pushing up on the value of the assets that underlie pension pots.

DERMOT MURNAGHAN: If it all works, there does come a point, doesn’t there, where you have to start nothing up on interest rates, do you envisage when that point might be?

PAUL FISHER: Well the market interest rate curve at the moment is flat for the next two years and therefore we are not going to anything for two years. Now all I can be certain of is that’s wrong, it will either be sooner or later, these things are always wrong. What we will be doing is keeping an eye on the medium term pressures on inflation. At the moment in our forecast for three years hence it is broadly balanced, so we think we are in about the right position now but as time rolls on, if we think we see inflationary pressures, the fundamental underlying inflationary pressures, pushing up then we will start to think about tightening.

DERMOT MURNAGHAN: Policy informed obviously by the forecasts and the guesstimates, whatever they are, that you make about the future of growth and inflation. No doubt you’ll have read with interest this article last week by David Blanchflower, formerly on the Monetary Policy Committee, saying quite frankly – and he is pretty blunt – he is saying the Bank’s been pretty rubbish at forecasting over the last few years, as he puts it ‘worse than the proverbial monkey throwing darts at a wall’.

PAUL FISHER: Actually I don’t think our forecasting record has been any worse than anybody else’s, including Danny’s. The point is the forecasting is just a representation of what we know, we don’t have a crystal ball, we can’t say what’s going to happen in the future. What we can say is knowing what we do about economics, knowing what we do about the current trends in the system, the current data, what do we think the underlying inflationary pressures are? That’s what we’re trying to get to and then we look at it in terms of the balance of risks. We don’t focus as much on the central projection as a lot of people outside, we say which way is it likely to go, can we see reasons why inflation would be materially weaker or stronger than what we expect it?

DERMOT MURNAGHAN: There are those that say, you’ve read the commentators probably more than I have, that say you are independent but you’re not unaware of the political mood music and you know that the politicians want a year where inflation is coming down and growth is going to go up and that’s why your forecasting has been optimistic.

PAUL FISHER: Well we wouldn’t feed into our forecast … the forecast is prepared by the staff, we make certain judgements, they tell us what the numbers are and you iterate until you get to an answer. It is at the end of the day the committee’s judgement as to what appears in that forecast but what we are trying to do is to bring inflation back to the 2% target in a way which doesn’t damage output and employment excessively, that’s what our remit actually requires us to do. It’s not simply 2% inflation and forget everything else, we have to take account of the fact that trying to bring inflation back too quickly when you have had the sort of cross shocks we’ve had going through the system would be the wrong thing to do.

DERMOT MURNAGHAN: But just lastly on the forecasting, from David Blanchflower’s article, could really we see 6% growth in 2015 according to, it must be said, just one of the scenarios set out in the February 2012 report? 6% in 2015, that’s cloud cuckoo land isn’t it?

PAUL FISHER: This is just one of the extreme probabilities in the distribution, but a whole range of things could happen. If the euro crisis was solved, if the world economy took off and we kept policy at our current rate which is the assumption underlying those sorts of numbers …

DERMOT MURNAGHAN: But anybody can say that, I mean also if it goes the other way, if the eurozone implodes, if there is a great oil shock, it could be minus six.

PAUL FISHER: So trying to pick out something from the edge of the probably distribution that’s in the tail is a bit silly. What we will be doing is keeping an eye on what’s happening to growth and inflationary pressures and if we started to see significantly above trend growth, we’d be tightening policy to calm it down. Of course you wouldn’t actually see that, that’s just what could happen if we kept policy at its current levels which is extremely accommodative.

DERMOT MURNAGHAN: Well Paul Fisher, thank you very much indeed, a real insight there into the mind and workings of the Monetary Policy Committee. Paul Fisher there from the Bank of England.