The Treasury Committee has agreed to the
following Special Report:
BANK OF ENGLAND: OPERATION OF ACCOUNTABILITYONE
YEAR ON: RESPONSES FROM THE GOVERNMENT AND THE BANK OF ENGLAND
MONETARY POLICY COMMITTEE TO THE COMMITTEE'S SEVENTH REPORT OF
On 17 July 1998 we published our Seventh Report of
Session 1997-98, Bank of England: Operation of AccountabilityOne
Year On, as House of Commons Paper 993. We have now received
responses from the Treasury (dated 16 October) and the Monetary
Policy Committee (MPC) of the Bank of England (dated 20 October),
and these are appended to this Special Report. For ease of reference,
the two responses are collated under the Report's recommendations
to which they refer. In addition, the Governor of the Bank wrote
to our Chairman on 7 October about the Monetary Policy Committee's
decision to publish their minutes around two weeks, rather than
six weeks, after their meetings, and this letter is also appended.
Committee's Conclusions and Recommendations,
with Responses by the Government and Bank of England Monetary
(a) We agree with the conclusion by the Organisation
for Economic Co-operation and Development (OECD) in its country
survey of the UK that "In international comparison the United
Kingdom's framework is among the strongest in terms of accountability
and transparency" and we recognise the contribution of the
Bank, in putting information into the public domain, and their
willingness to discuss policy decisions on an open basis (paragraph
(b) We will be looking to hold the MPC to account
for both its current actions and its past actionsin the
context of how inflation outturns relate to the inflation targetand
we expect to publish a further report in a year's time analysing
how the MPC has performed against its remit (paragraph 7).
(c) We shall hold further confirmation hearings
for any new members to the MPC and for the re-appointment of existing
members and we would press again for such hearings to be put on
a statutory basis (paragraph 8).
The Government set out its position on confirmatory
hearings very clearly in the course of the proceedings of the
Bank of England Act. The Government indicated that it had an open
mind on the suggestion that the Treasury Committee should have
the right to confirm appointments to the MPC. However, the Government
believes it is more appropriate for the House to consider first
the issue of appointments and the role of Select Committees in
general and not to legislate for confirmatory hearings for the
MPC in isolation.
The Government believes that the Treasury Committee
has sufficient powers at present to ensure that the MPC is held
properly to account. The Government welcomes the hearings that
have been held by the Treasury Committee, which have contributed
to making the monetary policy process open and accountable.
(d) We recommend that the MPC should give serious
thought to whether the minutes can be published earlier insofar
as this can be done without lowering the quality of the minutes
themselves or the quality of the debate they encapsulate (paragraph
The Bank of England Act sets a maximum of 6 weeks
between the MPC meeting and the publication of the minutes. The
publication of the minutes and votes at the MPC meetings is a
vital element of the openness and accountability of the UK's new
monetary policy framework. Within the statutory limit, the timing
of the release of the minutes is a matter for the MPC to decide.
The Government welcomes the decision to publish the MPC minutes
2 weeks after the meetings take place.
In earlier evidence to the Treasury Committee, members
of the Monetary Policy Committee (MPC) made clear that the Committee
would examine the question of the timing of the publication of
the minutes and report back to the Treasury Committee in due course.
The MPC has now done this, and its decision to adopt a publication
lag of two weeks was conveyed in a letter from the Governor to
the Chairman of the Treasury Committee dated 7 October.
The MPC hopes that the Treasury Committee will find it helpful
that the minutes of the most recent meeting will be available
when MPC members give evidence to the Treasury Committee following
publication of the Inflation Report. The MPC is determined to
maintain the quality of the minutes, which is a crucial element
in the arrangements for transparency of monetary policy.
(e) We recommend that the MPC give close consideration
to how the role of the Treasury representative is recorded in
future minutes and set out its conclusions in the response to
this Report (paragraph 17).
The Treasury representative does not have a vote
on interest rate decisions. His/her role is to establish a proper
two-way channel of communication between those taking decisions
on interest rates and those concerned with other aspects of economic
management. Comments made by the Treasury representative in the
course of the meeting are included in the discussion in the MPC
minutes except in exceptional cases where they involve confidential
information, such as on the planned fiscal stance in a forthcoming
Budget, which would be made public only after the minutes had
been published. But the fact that a briefing of this nature had
taken place would be minuted. None of the comments made by members
of the Committee in the discussion are attributed to individuals.
The Government believes that the position should
remain as at present. Publication of the Treasury representative's
views could undermine the independence of the MPC's decisionmaking
It is important to recognise that the role of the
Treasury representative is quite different from that of members
of the Monetary Policy Committee. The Treasury representative
is not a member of the MPC and has no vote on its decisions. The
reason for publication of the minutes of the MPC is to ensure
transparency about the debate on monetary policy which underlay
the decisions of the voting members of the MPC. As the Treasury
Committee recognises, the minutes of the MPC do not attribute
views expressed to individual members. It is the votes of individual
members which are recorded. It is important for the work of the
Monetary Policy Committee that there exists a channel of communication
between the Committee and the Chancellor of the Exchequer through
which information about fiscal policy can be passed to the MPC
and the views of the MPC can be relayed back to the Chancellor.
The comments made by the Treasury representative might on occasion
contain confidential information, such as on the planned overall
fiscal stance in a forthcoming Budget, which could not be revealed
in minutes published two weeks after the meeting. But the fact
that a briefing of this nature had taken place would be minuted.
(f) We recognise the deficiencies of private sector
earnings data with regard to periodic bonuses and other benefits
with which the MPC was faced. We recommend that the Bank, the
Treasury and the Office for National Statistics give early attention
to this point (paragraph 19).
The ONS has now generated and released additional
data quantifying the contribution of bonuses to earnings growth
back to January 1997. (The information is not available to produce
a longer backrun.) These estimates aid interpretation of
the average earnings data, partly addressing deficiencies identified
by the Treasury Committee and users such as HM Treasury and the
Bank of England. However, the estimated bonus data have limitations:
enterprises responding to the earnings questionnaire are asked
to provide information on bonuses only if bonuses are deemed to
have given rise to a significant change in the enterprise's paybill
(although such information may also emerge from the ONS's data
verification inquiries when returns show large earnings increases
or decreases). So bonus payments will tend to be underrecorded,
and if the degree of under-recording varies this will lead to
some bias in the estimated effect of bonuses on earnings growth.
In response to this concern, the ONS is actively
pursuing the possibility of amending the survey questionnaire
to seek more complete data on bonuses, and hence improve estimates
of their effect on earnings growth. Consideration is also being
given to identifying the nature of payments classified as bonuses;
and whether the average earnings data could be adjusted by applying
other data sources to produce complementary measures less affected
by variations between part and fulltime employment. Any
changes to the survey questionnaire will need to be assessed alongside
the implications for survey response rates and business compliance
costs. The ONS will consult with users of the data before implementing
The Bank has been in regular contact with the Office
for National Statistics about the earnings data. The additional
information that the ONS provided on bonuses has helped to interpret
movements in average earnings. But it did not go far enough.
The recent revisions and corrections to the earnings
data raise more fundamental issues about both the process by which
the data are compiled and published and the interpretation of
the data. The Bank, in conjunction with the Treasury, plans to
pursue these issues with the ONS as a matter of urgency.
(g) We shall be looking to see that the decisions
of the MPC were economically justified at the time they were taken.
We will also want the MPC to justify to us how it has fulfilled
the remit mentioned in paragraph 2 of this Report (paragraph 20).
(h) We ask the MPC to explain to us the extent
to which it has taken into account the impact of raising interest
rates on capital flows into the UK, with the consequent effect
on exchange rates (paragraph 21).
The MPC does take these important factors into account
in its economic analysis and policy decisions, since they affect
the outlook for inflation. This involves looking at the capital
flows and the exchange rate together. In today's highly developed
capital markets, and with a floating exchange rate, the prices
of financial assets generally move rapidly in response to news,
without always being accompanied by large movements of funds.
As the relative price of two currencies, sterling's
bilateral exchange rate against another currency will reflect
any development that affects the value of either currency. The
MPC's decisions are of course an important influence. Other things
being equal, an unexpected change in official interest rates or
a change in expectations of future rates will cause sterling to
shift up or down to a new level. This is always taken into account
when deciding on interest rates.
But other factors also matter. For example, changes
in actual and expected overseas monetary policy; developments
affecting the sustainable real exchange rate, such as the pattern
of external demand for UK/partner country goods and services,
and relative productivity changes; and changes in the market's
perception of the risk of holding assets denominated in the two
currencies. Analysis of possible causes of changes in sterling's
exchange rates against other currencies is essential, since different
underlying causes can have quite different implications for the
UK inflation outlook. In formulating its forecast of inflation
and activity, the MPC therefore forms a view on two things. First,
why sterling has moved in the past; and secondly, what path sterling
is most likely to follow in the period ahead and the risks of
it departing from the path assumed in the central projection.
The Committee's analysis and assumptions are explained in the
quarterly Inflation Report (pp 12-13 of the August 1998 Report).
And its discussion of these issues in the context of its monthly
decisions on interest rates is summarised in the published minutes
(eg paragraph 35 of the minutes of the 3-4 June meeting, when
rates were raised by 25 basis points).
(i) We agree with the Bank and support the current
framework, by which the voting of individual MPC members is disclosed
(j) The range of experience on the MPC is an issue
which we will expect the Government to bear in mind when the tenures
of the current external appointees come up for renewal (paragraph
The Government is committed to appointing recognised
experts. The Chancellor was delighted in securing the services
of such wellqualified external appointees last year.
The task of the MPC is to achieve the inflation target
set by the Government, taking full account of all the regional
and sectoral information available as well as other evidence.
The Government will continue to appoint members with the experience
and abilities required to carry out this task.
People with a wide range of backgrounds are now members
of the Court of the Bank (which is rather larger than the MPC).
Amongst other things, the Court is charged under the Bank of England
Act with ensuring that in the process of formulating monetary
policy the MPC collects the necessary regional and sectoral information.
(k) We recommend that the Bank should commission
on a regular basis an opinion survey to get direct feedback on
the MPC's public impact (paragraph 27).
The Monetary Policy Committee is considering ways
in which it can communicate more effectively with the public at
large, and, in particular, how it can best make the case for price
stability, as defined by the inflation target, and explain its
actions to the country as a whole. Financial markets are one indicator
of the credibility of the MPC's commitment to the inflation target.
But the opinions of households, businesses and unions are also
vitally important. Members of the Monetary Policy Committee carry
out a wide range of speaking engagements throughout the UK. The
MPC places great importance on the need to explain the importance
of price stability and reasons for its decisions not just to the
Treasury Committee but to the public at large. In considering
how best to take forward its strategy of public explanation of
its remit and actions, the Committee will examine the costs and
benefits of a regular opinion survey along the lines recommended
by the Treasury Committee, and indeed other options.
1 See page vii. Back