From Goldman Sachs to the MPC
I can reveal that the new member of the Monetary Policy Committee (MPC) will be Ben Broadbent, a senior economist at Goldman Sachs. He will replace the leading proponent of rate rises, Andrew Sentance, when he leaves the Bank of England's interest rate committee in May.
Mr Broadbent is a widely respected economist who spent some of his early career at the Treasury. In the past year or so, Goldman Sachs has tended to be more upbeat about the UK and global recovery than many in the city, and Mr Broadbent's own commentaries have been consistently supportive of the government's tough approach to the budget, arguing that the economic recovery was strong enough to withstand the effect of spending cuts. Only today, he and a colleague published a paper suggesting that households were less vulnerable to interest rate rises than generally thought.
Many will therefore expect Mr Broadbent to follow Mr Sentance in voting for higher interest rates when he joins the committee. Three voted for a higher rates at the February metting, with 6 against. There is another meeting this week, but most do not expect the balance to change until April or May, if then. Mr Broadbent's first MPC meeting will be in June.
However, Broadbent has also stressed in the past that a weak pound would be crucial to offsetting the impact of spending cuts, by pushing up exports. The pound could strengthen if interest rates rise faster in the UK than in other countries.
More recently, he and his team have also drawn attention to the impact of rising commodity prices on household incomes. I wrote about their research here a few weeks ago.
Today's report, which Broadbent co-authored, says only "the MPC is divided and there are respectable arguments both for, and against, higher rates. But the sensitivity of households' interest payments is not top of the list."
Critics will note that there are still no women on the nine person committee, which lost its only female member last summer. Officials say the post has gone to the stand-out candidate, whose reputation speaks for itself. They also say there were 27 applicants for the post, of whom only one was a woman.
More important, to some, than the gender imbalance will be the marked imbalance of outlook on the new MPC. When Mr Broadbent joins, all of the four external members of the MPC will have spent most of their career as macro-economists. In the past there has been a desire to mix in some micro-economists, or at least people, like Mr Sentance, with experience as industrial or business economists. Arguably, that is now a missing voice on the MPC. But neither that or the gender imbalance are likely to be resolved any time soon. The four external members of the MPC are all fairly recent appointees, who could each see their contracts renewed for another three-year term before another new face comes to the committee.
Update 1546: Famously, Rolling Stone magazine described Goldman Sachs as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." I know for a fact that Ben Broadbent vigorously disagrees. But squid-watchers will note that he is the third Goldman Sachs man to join the MPC since its creation in 1997. Andrew Sentance actually replaced the last Goldman man, David Walton, who died suddenly in 2006. Sushil Wadhwani, a former Head of Equity Strategy at Goldman, served on the MPC between 1999 and 2002.
Less contentiously, readers of Stephanomics may remember that Ben Broadbent was one of the 'GDP sceptics', who thought the strength of the recovery was being understated by the ONS in the second half of 2009. This came to the fore in his response to the first estimate for GDP in the third quarter of 2009. This was widely expected to mark the end of the recession. When the ONS announced that output had shrunk by 0.4%, Mr Broadbent claimed the GDP figures were "literally unbelievable".
That figure has subsequently been revised up, but only by 0.1%. On the face of it, the ONS has come out ahead, though the Goldman Sachs team point out that the major revisions to the official GDP numbers tend to be years after the event.
I suspect Mr Broadbent will warn people not to confuse his views with those of his team - or to assume that he will take the same view on these issues in June that he takes now. But it's hard not to look for clues in his most recent research reports. I'm particularly struck by a note entitled "Three Questions for the UK Economy", published on January 7.
In that paper, which in this case is signed by Mr Broadbent, he asks three questions which go to the heart of the debate now raging at the MPC. First, can the economy absorb the effect of cuts? Second, will rising costs (of imports etc) push up wages? And third, will the MPC continue to ignore high headline inflation?
On the first question, he says there will be a hit to the economy, especially in the short run, but that this issue generally gets overdone, and people forget that fiscal policy has already tightened quite a lot. They also, in his view, forget the crucial role that private investment will play in the recovery. Similarly, he has long argued that the private sector can create more than enough jobs to offset losses in the public sector.
On the second question, he concludes that there must be a wage response to rising costs, even if it is now only partly visible in the headline pay data. (Incidentally, the Bank does too - the latest Inflation report forecast builds in some "second-round" effect on wages of above-target inflation.)
Third, and perhaps most interestingly, he has this to say about the Bank and its approach to rates:
"We doubt policymakers are deliberately aiming for high inflation. But their 'reaction function' certainly seems to have changed and it's possible that, in the face of deleveraging and uncertainty about the supply side, the MPC is running a de facto nominal GDP target. If so, then it will be hoping that, in the race between supply-side improvement and credibility impairment, the first is the winner."
"We continue to expect no rate hikes till the end of 2011. But, amid all the endless coverage of the fiscal tightening - which we, no doubt, will add to - it will be worth keeping an eye on trends in private-sector pay."
Remember this was written on January 7th 2011. The debate has probably moved on since that was written. And now, so has the author.