ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS

DERMOTT MURNAGHAN:  Here with me now to interpret what was said by Sir Charlie Bean from the Bank of England are the former Chancellor Lord Lamont and the former Chairman of the FSA and ex-Deputy Governor of the Bank of England himself, Sir Howard Davies.  Very good to see you both, thank you very much indeed.  To start with an overview Sir Howard, if you will, does Sir Charlie leave the Bank at a time when it seems to have a grip on, let me phrase it, the known problems within the economy and externally and the tools to deal with the unknowns? 

HOWARD DAVIES: Well it has got a new instrument which they are attempting to use which goes under the jargon of Macro Prudential Policy.  If you remember, Mervyn King said that all we can do is deliver orations at funerals and not actually act when we see problems in the financial sector, so they do now have a new lever to pull in addition to the short term interest rate and that’s a big change.  The question is, picking up where Charlie Bean ended, have we actually learnt, will this time be different, are they using that instrument as robustly as they might?  What we’ve seen this week is a kind of promise maybe to use this instrument if things get a lot worse and there are some people who think that they should be exercising a bit more muscularity here and getting ahead of the game rather more than they are.

DM: Lord Lamont, picking up on what Sir Howard says, there is always an element of bluff and counter-bluff isn’t there from the Bank with the markets and all that?

LORD LAMONT: There is an element of bluff, I suppose so, but I think the point that Howard is making is the key one, that the Bank now has a wider variety of tools but the question is do they all pull in the same direction?  That I think is the great problem.  You may have moments where for one reason the Bank wants to let us say keep interest rates low but on the other hand Macro Prudential Policy requires that you have a tightening of policy so in a sense this is a throwback to an older regime in the Bank, a more ambiguous regime where it is not so much a question of giving clear unambiguous guidance to the markets but actually nods, winks, twitches of the Governor’s eyebrows, I think we’re back in that territory a bit.  We’ve been through a slightly embarrassing period where first of all the Bank of England said it was going to issue forward guidance, then it said that interest rates would remain low for a very long period contrary to what the market was anticipating, then we were told the market may be about right and now we’re being told the market may be behind again.  So it’s a continuing moving narrative.

DM: And when the Governor appeared before MPs they told him he was like a hot and cold girlfriend and that forward guidance doesn’t really count for anything. 

HOWARD DAVIES: Well there has been I think a little bit of over-communication recently, I think Norman is absolutely right.  In an attempt to steer the market we’ve had a few turns of the wheel this way and turns of the wheel that way which I’m not sure is hugely helpful.  Picking up actually on Norman’s point about the relationship between the two tools, I’m personally of the view that having an FPC, Financial Policy Committee, at one end of the corridor and a Monetary Policy Committee at the other end of the corridor is really one too many committees because the impact of what they are doing on the tightening of the housing market has an impact on the availability of credit, ultimately on the cost of credit, which also interest rates and quantitative easing does and I personally think it is over-engineered at the moment.

LORD LAMONT: I totally agree with that and when the regime was first announced I said I thought the two committees should be one.  I mean it just doesn’t make sense if they pull in opposite directions and obviously the Governor has to – and there is some overlapping membership – has to try and resolve the differences but I don’t see why you have two committees. 

DM: We also heard Charlie Bean there talking about the real fears of indebtedness, they are not targeting house prices but they are looking at the levels of indebtedness.  Now of course if and when those interest rates start to go up, how robust are people’s balance sheets?  What do you feel, let’s talk about this new normal, if we go back to 2.5%, 5% in many people’s memories will still be significantly lower than we have been used to, what sort of damage will that do to people?  

LORD LAMONT: I think that’s why the Bank has been making these noises, as have the Federal Reserve in the United States.  Rather paradoxically Janet Yellen said even when things revert to normal, interest rates will still remain low beyond that.  Now that was a very puzzling remark, if things are normal, why should interest rates remain very low?  I think that is also what the Bank of England feels because they are not sure quite how many mortgagees, people with mortgages, can actually withstand a rise in interest rates.  You know, I wonder, I doubt whether interest rates will go up, even when they do go up, very sharply, they will probably go up in small increments.  The Bank is bound to be very cautious because if events go the other way and policy seems to be not suitable for tightening, they can’t lower interest rates further, we’re absolutely at the bottom, to use Draghi’s term we’re at the zero bound, so I think for that reason the Bank will be very, very cautious about the speed and at which point it point it puts up interest rates.  

DM: You last feelings on that Sir Howard?

HOWARD DAVIES: Well I just noticed that among all developed counties we are the country with the second highest level of overall debt after Japan and we haven’t yet made much progress in getting that debt down and indeed QE has tended to bias us towards taking on more debt.  I’m afraid I’m one of those unpopular people who think the Bank should be getting on with a bit of tightening because I’m still concerned about the overall level of indebtedness and our enthusiastic propensity to take on debt, whether it’s government or households or companies.

DM: Okay Sir Howard Davies, Lord Lamont, thank you both very much indeed.