The New Statesman Interview - DeAnne Julius
She is the odd one out at the Bank of England -- a woman, an American and an optimist who wants lowe
DeAnne Julius stands out from the rest of the Bank of England's Monetary Policy Committee, which decides the cost of borrowing every month. For one thing, she's a woman. For another, she's an American with an unusual name. Most important of all, she's the Bank's leading dove.
When the Bank pushed up interest rates to 6 per cent last month, she was the only person on the nine-strong committee who voted to keep them at 5.75 per cent. It is not the first time she has voted against the majority. Appointed in September 1997, she first broke ranks when the Bank was yanking up interest rates in the summer of 1998, arguing instead for cuts. The Bank eventually got round to reducing rates in October 1998; she pressed for deeper cuts. When the Monetary Policy Committee first started pushing up rates again last September, she argued for a standstill.
Everyone knows the pressures you face in a committee to get into line. What is it like voting so often against a majority? Julius agrees it can be hard. "It's difficult for any one at the end of day with a group of respected colleagues to find that indeed your judgement differs from most of theirs."
So why is she so often out of line? Is it because she's the solitary woman on the committee or because of her American background? She rejects either interpretation. "Frankly, I think that it has to do with a different judgement on how the balance in the economy is moving at any point in time."
But why, then, has she reached a different judgement on so many occasions? She points to her background in private business, saying that she filters "what I hear and see in the economy through the eyes of how it's likely to affect businesses".
Her business background marks her out from the other members of the Monetary Policy Committee. Julius is one of the four "outsiders" appointed to the MPC who take decisions along with the five other career members of the Bank. For some reason best known to itself, the Bank prefers to call these outsiders "externals", a term with an Orwellian ring to it. Unlike her colleagues, Julius has long experience of working in industry - she has worked as chief economist for British Airways and, before then, for Shell.
Julius undoubtedly attaches great significance to the regular visits she makes around the country. Shortly after the meeting in February that pushed up rates to 6 per cent, she visited Nottingham and found business conditions less upbeat than you might have anticipated on the basis of that decision. "Nottingham was a very mixed place. I expected it to be a little more buoyant than it was. Certainly, some of the manufacturing there is having a pretty difficult time of it."
This week, she was making a trip to Newcastle to meet industrialists and bankers. But she couldn't bring them what they most want: a lower pound. Northern manufacturers complain bitterly that their sector, exposed to international competition, bears the brunt of economic policies that keep the pound high. Indeed, in February the Monetary Policy Committee even contemplated intervention - selling pounds on the foreign exchanges - but ended up rejecting it. Clearly, Julius went along with that decision. She agrees that the pound presents a problem, "but it's not certain that we are the solution to it. In fact, I'm afraid we're not."
Instead she thinks that the strong pound is partly a vote of confidence in the UK economy and also a mirror image of a weak euro - something the Bank cannot affect.
I suggested to her that one thing that would bring the pound down would be for the government to state a target for a reasonable exchange rate at which Britain could join the euro. Surely, if the Chancellor were to state such a figure, that would have a pronounced effect on market expectations. Julius is not so sure. "Would it? He could certainly say it, but whether the markets would pay much attention - at least after the initial flurry of excitement - I'm not at all convinced."
Nor is she that convinced that Tuesday's Budget can help. In principle, the Chancellor could tighten fiscal policy. That would allow the Bank to keep interest rates lower and so weaken the pound. But Julius sounds a sceptical note. "In the theoretical sense, that's right. I think in practice, though, the linkages aren't quite so firm."
This scepticism about the way policies actually affect the economy characterises her approach to setting interest rates. In order to meet the target for inflation of 2.5 per cent, the Bank has to take into account the long time that it takes for interest-rate changes to affect inflation. It therefore projects inflation over the next two years. But, quite reasonably, Julius says: "I think the world is quite uncertain looking that far ahead."
The Bank has been criticised for a hyperactive approach to interest rates, which have changed on 16 occasions in less than three years since it was charged with setting them. The MPC marched rates up to 7.5 per cent, then down to 5 per cent, and now up again to 6 per cent. A provocative critique from the National Institute of Economic and Social Research suggested that it could have reached the same outcome simply by holding them at 6 per cent. Julius doesn't buy this line, but she does concede that "by looking at that forecast too fixedly, one might well be moving too often".
Northern regions also bitterly complain about monetary policy being set to deal with overheating in London and the South-east. One of the reasons interest rates have gone up is concern about house prices spilling over into rampant consumer spending as occurred in the late 1980s. DeAnne Julius is more relaxed, interpreting recent house-price rises as a recovery from depressed levels in the mid-1990s. "London is a particular anomaly," she argues. "Certainly, one should not look at London as being a symptom of what is going to happen to the rest of the country. This is an area with very heavy employment and concentration of financial services, which has done extremely well in the past couple of years and where bonuses are a part of life."
So, no housing-market bubble - but what about a stock-market bubble, particularly in Internet stocks? I interviewed her on the day of the flotation of Lastminute.com, when a company that turned over less than half a million pounds in the last three months of last year soared into the valuation stratosphere.
Julius admits there are dangers. "One way is to say these things are clearly excessive. There's clearly a major bubble that is going to burst and, when it bursts, there'll be fallout all over." But on balance, she thinks this is too gloomy an interpretation, despite some "excessive valuations out there in the market".
Revealing herself as a fan of the new economy, she says we could be "in the midst of a period of quite fundamental industrial restructuring. The technological advances in information and communication technology are going to be so pervasive, and have such a large impact on company strategy, that the stock market is bringing forward these ideas in time and placing its bets early on which companies are likely to succeed."
Indeed, the stock market's apparent lunacy may help bring about this transformation. "The economy as a whole is benefiting from . . . lots of capital available to start-ups, something that virtually every government has wanted to do for decades, to support entre- preneurs and new business ideas. Now it is happening through the stock market."
Julius's optimism about the prospects for a new economy is shared by Sushil Wadhwani, another outsider who was appointed more recently to the MPC. The ultimate prize would be a big jump in economic growth through higher productivity. In contrast, the Bank's mainstream view is expressed in the last inflation report, which envisages no change in the long-term trend for labour productivity to grow by around 2 per cent a year.
Julius disagrees with this view, again stressing what she hears from business. "I hear again and again the kind of productivity improvements that companies have made." She argues against investing too much weight on historic trends.
Indeed, she sees the 1970s and the 1980s as an exceptional period. "My view is that it's quite risky to base predictions for the future on what happened in the seventies and eighties, and that's particularly true in this country." She advocates a longer perspective. "In looking forward, we do need to look further backward to think about other parallels." What she finds is that high inflation is the exception to the rule. She sees the UK, along with other economies, as returning to a future of low inflation.
At the same time, she points to fundamental improvements in the labour market that have improved the trade-off between inflation and unemployment. She sees nothing sacred about the current level of unemployment - now just under 6 per cent of the labour force. She thinks that it could fall further without stoking up inflation, provided it doesn't fall too fast. "I think that it can only come down lower in a safe manner - slowly."
Although she would no doubt disagree, it seems that Julius does bring an American flavour of optimism to her role on the MPC. Given the ingrained sense of pessimism about the British economy in the policy establishment, that's no bad thing.
She also brings a welcome open-mindedness about policy- making in an uncertain world. She's properly sceptical about forecasts, and she attaches a lot of weight to what businesses say is actually happening out there in the real economy. She is in favour of a delicate, rather than a crude, touch on the interest-rate tiller.
Julius's influence on an often hawkish committee has almost certainly been for the good. Whether her enthusiasm for the new economy is merited, we shall see.