Select Committee on Treasury Seventh Special Report


SEVENTH SPECIAL REPORT


The Treasury Committee has agreed to the following Special Report:—

BANK OF ENGLAND: OPERATION OF ACCOUNTABILITY—ONE YEAR ON: RESPONSES FROM THE GOVERNMENT AND THE BANK OF ENGLAND MONETARY POLICY COMMITTEE TO THE COMMITTEE'S SEVENTH REPORT OF SESSION 1997-98

On 17 July 1998 we published our Seventh Report of Session 1997-98, Bank of England: Operation of Accountability—One 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 Policy Committee

Committee conclusions

(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 6).

(b) We will be looking to hold the MPC to account for both its current actions and its past actions—in the context of how inflation outturns relate to the inflation target—and 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).

Government response

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.

Committee conclusion

(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 15).

Government response

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.

MPC response

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.[1] 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.

Committee conclusion

(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).

Government response

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 process.

MPC response

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.

Committee conclusion

(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).

Government response

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 any changes.

MPC response

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.

Committee conclusions

(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).

MPC response

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).

Committee conclusions

(i) We agree with the Bank and support the current framework, by which the voting of individual MPC members is disclosed (paragraph 23).

(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 25).

Government response

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.

Committee conclusion

(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).

MPC response

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


 
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