ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS

DERMOT MURNAGHAN: Now the Prime Minister hailed last week’s growth figures as proof that the economy was turning the corner. The Band of England sounded a bit more of a cautious note, warning we could be zigzagging in and out of recession for many more months to come and as the Bank of England attempts to nurse British economy back to health it will be done with a new Governor and a new set of powers with Sir Mervyn King stepping down from the top job next year. In a moment I’ll be speaking to his deputy, Deputy Governor Charlie Bean. Let’s say a very good morning then to the Deputy Governor of the Bank of England, Charlie Bean.

CHARLIE BEAN: Good morning.

DM: Can we start first of all with the return of growth to the UK economy, the Bank I suppose like many other institutions and politicians will be heartened but cautious?

CB: I think that’s a pretty fair description. It’s good news, the number was certainly stronger than most commentators were expecting and indeed stronger than we were expecting but we should avoid getting over-excited. About half of it was simply due to a recovery from the second quarter where output was depressed because of the extra Bank Holiday for the Diamond Jubilee. On top of that there was a fillip from the Olympics which will go away when we go into the next quarter so it’s quite possible that we might see weak growth in the four quarter. The big picture here really is of an economy that has bumping along the bottom for at least two years.

DM: Well exactly, because if you look even at the negative figures they’ve been revised upwards a bit and this figure of course could be revised downwards, so what you end up with is with this pretty flat and patchy picture which has persisted for a long time and is it the Bank’s view will continue for a lot longer?

CB: Well you are absolutely right to draw attention to the susceptibility to revision of these numbers. The Office for National Statistics keeps on getting more information for months, quarters, years afterwards and often the picture of what’s gone on can look very different further down the road. However, we do think there is reason for some optimism going forward. Some of the headwinds that we’ve been struggling against in the past couple of years will be abating somewhat, most particularly we’ve seen a big squeeze on households real spending power. Commodity prices, oil prices have risen, obviously there is an increase in VAT as well. Going forward that squeeze shouldn’t be so intense, we know there are one or two unwelcome things to come through – utility prices have been going up again this autumn and probably a spike in food prices because of the unusual weather but generally speaking, real household income won’t be squeezed quite as much. On top of that there has been some progress in dealing with the eurozone problems, there’s still a long way to go there but again a slightly better picture and also some signs that conditions are improving in the banking system.

DM: So things potentially to look out for, what I wanted to ask though was how does the Bank interpret that GDP figure in terms of its own policy and I mean specifically in terms of quantitative easing? Is that evidence to the Bank that the previous policy has worked and that quantitative easing has had a contribution to that figure?

CB: I think it’s always a mistake to read too much into one figure. What we try and do is draw together all the various strands, data on output, data on employment which incidentally had suggested a rather stronger performance than what’s been happing to output, also what’s been happening to prices, costs, to tease out a picture of what’s going on. As I say, it looks like the economy has been bumping along the bottom but when it comes to quantitative easing, the difficulty always in assessing its impact is knowing what would have happened if we hadn’t done it. It’s tempting to think that simply because growth has been weak, quantitative easing hasn’t had an effect, I would say that assumption is unwarranted. We are pretty certain that it has had the effects that we expected on asset prices and on longer term interest rates, where it’s difficult to be more certain about its impact is the effects further down the line because what should happen as a result of lower long term interest rates, lower cost of capital to businesses, higher wealth which will boost consumer spending, is just how much stronger it has made it relative to what it would otherwise be.

DM: I know one of the other criticisms of the policy is that a lot of the money has ended up – and this moves me on to the banks – in bank vaults as they start to bolster their balance sheets because of the new regulations and the new requirements upon them. Can I segue into that now and ask you your view on the current health of the major British banks?

CB: Okay, first of all I should say that quantitative easing, we buy gilts from the non-bank sector but what we do is we pay the money which they will then hold in their bank account, that’s why the reserves with the banking system go up. But in terms of the health of the banking system, UK banks have made significant progress in improving their resilience having a higher ratio of capital to their assets than they had at the time of the crisis. That means if they are subject to losses, then there will be more that can absorb those losses before it starts falling on creditors or the tax payer in a worse case would have to come in, so banks are certainly more resilient but we still think there are risks out there, most particularly from the eurozone. If things worked out badly there, there would almost inevitably be side effects on to UK banks …

DM: So given the extra powers that the Bank of England are getting, huge extra powers in terms of regulation of the banks – and of course looking back at what happened with the financial crisis – if your view in the Bank of England differs from the management of a big British bank, what would you do in these circumstances to intervene and say we think you’re lending too much, we think you’re borrowing too much or whatever? Would you be much more proactive in those cases?

CB: As of the spring of next year the Bank will get back from the Financial Services Authority the responsibility of supervising the banks. We do intend to take a slightly different approach from that which has been followed in the past, focusing less on box ticking if you like and focusing on where are the big risks in a bank’s business model so precisely …

DM: So you are saying to banks, we are going to be proactive, we are going to be interventionist?

CB: Yes, we would say to the banks we think you’re over exposed in this particular area, we think you need to hold more capital against the risk of losses in those areas and, as you say, potentially more interventionist but focusing on where we think the big risks to the system are rather than getting bogged down in small details.

DM: Okay, and do you think … I mean there’s that system being put in place, meanwhile the eurozone countries and perhaps others in Europe, putting together their own system. Can the two dovetail or ultimately do you see there has to be some kind of melding, some kind of overlap in terms of those system of regulation?

CB: Well there is already a lot of co-operation in the formulation of banking regulations. The Basle Committee is an international committee, we are very active in the discussions that take place internationally in the design of regulations, there has been a lot of that activity going on since the crisis for obvious reasons. I and the other Deputy Governor, Paul Tucker, spend an awful lot of time at international meetings trying to thrash these things out but as far as banking union in Europe goes, the government’s view – and it is a view that we share – is that it’s an important step forward to improve the resilience of the eurozone but we don’t think the UK needs to be part of it, we don’t particularly want to be part of it so what will be important going forward is that we establish a modus operandi that ensures that decisions that are taken in the European Banking Union don’t impinge adversely on the way the single market in financial services in Europe operates. Now I think it should be possible to find a suitable modus operandi and then I would expect the Bank of England will co-operate with the European Central Bank and the other supervisory authorities to ensure Europe has a stable banking system.

DM: In our conversation this morning it just goes to show what an awful lot there will be on the plate of the new Governor of the Bank of England. Now Mr Bean, you said you’re standing down perhaps, does it depend on who takes over from Sir Mervyn?

CB: I let the Treasury know some time ago that I wasn’t interested in taking over from Mervyn, I don’t see myself as having the right skill set to be Governor and on top of that I have personal reasons for not wanting to do it, it would take me through until I was 68 and there are other things in life. What I have said is that if it’s helpful to the new Governor for me to stay on a little bit to smooth the transition, to avoid all the top brass of the Bank turning over at the same time, I am happy to stay on for a little bit.

DM: You mentioned the skill set required for the Governor, I mean you’ve got an intimate knowledge of how the Bank of England works at the moment and how it is going to change, would you say – and I know that you are not going to name any particular candidate for me but would you say on the list of candidates, on the front runners that are being mentioned for that position, that they have that skill set?

CB: All of the names that have been touted in connection with the job, each of them would bring a lot to the job, I think all of them would do a very good job. There may be some other names, I’m not party to the list of names that are being considered but I don't think it’s the case that the cupboard is bare. There are actually a lot of good candidates.

DM: But if there was one of them that you thought had an extra special skill set, let me put it that way, asked you to stay on, would you?

CB: As I say, if the Chancellor and the Governor, new Governor that is, asked me to, I am happy to stay on for a short period to smooth the transition but if they have got a clear idea about who they want to take over my role as Deputy Governor for Monetary Policy, then I’d be quite happy to finish my career at the same time as Sir Mervyn, in the middle of next year.

DM: Okay, Charlie Bean, thank you very much indeed, the Deputy Governor of the Bank of England there.

CB: Thank you.