Examination of witnesses (Questions 1
TUESDAY 12 DECEMBER 2000
MS B BLOW,
GIBSON, CBE, MRS
F HEATON, and MS
1. Welcome. Would you like to introduce your
(Baroness Noakes) Certainly. On the extreme right,
Sir Ian Gibson, next to me on my right Frances Heaton, Sheila
McKechnie on my left and on my far left Bridget Blow, all of whom
are non-executive directors of the Bank. You have the whole range
from one of the newest in Bridget Blow to the most senior in Frances
2. The Bank of England Act gave the non-executive
directors certain specific functions. Can you remind us what they
(Baroness Noakes) The non-executives have very specific
functions: to review the performance of the Bank against its objectives
and strategies, to monitor its financial management objectives,
to review the Bank's internal financial controls. We have to determine
how the pay of the governors, that is the governor and the two
deputy governors, is set and we have to set the pay for the Monetary
Policy Committee (MPC) members. We have to review the MPC's procedures
including whether or not adequate regional and sectoral information
is gathered for the purposes of monetary policy setting and on
top of all of that we report on those responsibilities once a
year, our report being included in the Bank's annual report.
3. That is really quite a lot of responsibilities.
(Baroness Noakes) Quite a lot of responsibilities
though most of those responsibilities are in the nature of review/monitor
responsibilities, not taking responsibility for setting objectives
and strategies; that is part of our collective responsibility
within Court. We have particular responsibilities to review the
performance, most importantly then to write about it in the context
of the annual report, which we do.
4. From our point of view I suppose the most
important part of your remit is the fact that you assess and monitor
the procedures of the MPC.
(Baroness Noakes) That is the most onerous part of
5. Can you tell us anything about that and what
areas for improvement you have identified?
(Baroness Noakes) What we do in reviewing the procedures
of the MPC is look at a whole range of aspects of how the procedures
actually work, starting with defining what those procedures are
and then going through a range of activities which includes the
monthly report of the MPC to Court as required by statute and
all of the members of the MPC attend Court for that. We attend
the pre-MPC sessions, we have annual discussions with each member
of the MPC and the Treasury's representative about how they see
the procedures working. We look at things like the minutes of
the meeting which come out monthly, we look at the inflation report
and discuss those with members of the MPC. We look at the work
of the regional agents, which I know this Committee has looked
at in the past, and then we look at what kinds of information
flows, in particular regional and sectoral information flows,
are going to the MPC. Then we do things like external reviews.
In the past for example we have discussed with the IMF when they
have been over what their views of the procedures which have been
adopted by the Bank are. You are aware that over this year we
commissioned via the Bank a report by Mr Don Kohn, who is Director
of Monetary Affairs at the Federal Reserve Bank in Washington,
to come to look at the procedures, very specifically to give us
an external perspective on the procedures. I would say that it
is a process of regular review and regular discussion with the
MPC members. Our most important concern is to make sure that they
see the procedures as a live issue, that is that they themselves
keep under review how they do things, they challenge what they
do themselves and are on a path of constant improvement. For us
that has been one of the most encouraging features of what we
have found. When you ask me what areas of improvement we have
identified, the most important thing has been to identify with
the MPC that they are an organisation which believes in constantly
reviewing how they do things. If you look at the three years since
they have been operating de factotwo and a bit years
since they were set up by the Bank of England Actthere
have been quite a lot of changes in how they do things. Even over
the last few months they made a number of changes in how they
handled data and pre-MPC process, how they pull information together
for the quarterly forecasting round, partly in response to their
discussions with Don Kohn, but also partly in response to themselves
constantly questioning what they do. We have seen this very much
as a continuum. Would any of my colleagues like to add where they
see the main areas of development have taken place?
(Ms McKechnie) The regional data. We do meet with
the agents once a year and when we had a meeting with Don Kohn
to discuss his draft report before it was published we asked him
specifically what he thought of that. He was extremely complimentary.
The information is not statistically valid in the same way that
a long-term survey would be valid but it is good intelligence.
His general view was that it is better intelligence than the Fed
(Sir Ian Gibson) I would support what Ms McKechnie
says. What we encourage and what we certainly see is the process
of debate and review of what is taking place, of how it is working
and what is being done. Given that there does not appear to be
a single formula applicable worldwide on how to run a central
bank or how to run the equivalent to an MPC, whatever you might
call it, a markets committee, having that debate and having that
review is perhaps the most important single part of the committee
duties, apart from picking a number each month. It does that and
we are part of that process.
6. On page 57 of the Bank's annual report you
say that the Monetary Policy Committee's procedures operated satisfactorily
during the year March 1999 to February 2000. You will recall that
in October 1999, quite a row was publicised in the Financial Times
over support that the MPC was getting in terms of research. Given
that row, I wonder how you could possibly come to the conclusion
that the procedures were satisfactory? Could you give us your
thoughts on that?
(Baroness Noakes) Certainly. The row, as you put it,
which got into the newspapers was part of a series of discussions
which had been going on since the summer, which was when the non
executives became aware of the issue which was a set of discussions
between the external members of the MPC and the Bank about the
level of personal resources they should have dedicated to them.
Those discussions went on during the autumn at which point the
so-called "row" got into the newspapers. It was solved
I believe to the satisfaction of all parties, in particular the
external MPC members, by December. That was a series of discussions
about what level of resource was appropriate for personal support
and also wrapped up a number of other issues which had probably
lacked complete clarity at the time which was the way in which
the research programme, drawing on the resources of the whole
bank, should be set both on a short-term basis and on a long-term
basis. By December a whole load of things had been pulled together
on the nature of personal resources and the way in which the overall
research programme went. At no point during that was it ever suggested
that the process of setting monetary policy was harmed; indeed
one of the things when I spoke to every individual member of the
MPCand I did speak to them at least once during that period
of seven months as well as speaking to them collectivelyall
of them said this was a set of discussions which was going on
outside the committee room of the MPC and that the setting of
monetary policy was not affected by that. It was simply an issue
which needed to be resolved and was resolved by Christmas. When
we came to our report the following April, we certainly looked
at that and we encouraged the Bank to be quite explicit about
how that process had gone on in its review of monetary policy
procedures, which is slightly earlier in the annual report. That
was a full explanation of what went on. In the light of that full
explanation and bearing in mind that we found no harm done to
the process of setting monetary policy, we found it relatively
straightforward to reach the conclusion that we did. I do not
think anybody can pretend that everything is going to be perfect
all of the time. It got blown up a little out of proportion when
it got into the press, but something had to be actively solved
7. I thank you for that answer, but you will
know as well as I do that if things like that get in the press,
first of all it is deeply unedifying and whoever was putting it
in the press did it for a reason. It was a symptom of deep concern
if not anxiety about how the procedures were operating in terms
of making representations for more support and that not being
forthcoming. Things like that do not get into the press unless
there is concern. What I should like to ask you, following on
from your reply, is why you did not pick up this concern and defuse
it before it reached the press? Is there something wrong in your
information gathering system or are you happy with it?
(Baroness Noakes) We have a process which has roughly
an annual cycle to it of satisfying ourselves that the MPC procedures
are operating effectively and as you know it led to the report
we made in May 1999 on that. As a runup to that, on behalf of
the non-executives I spoke to every single member of the MPC at
the time about their perspective, including the amount of resources
which were made available to them. We have a series of key questions:
one of them is about the adequacy of resources. At that stage
there were some minor concerns about resources: they were not
major concerns about resources. Then there is a change in appointment
and the balance between full-time and part-time members shifted
during the summer. The first I became aware of there being an
issue was in August, which was only shortly after the issue started
to be discussed with more intensity. In April I was quite clear
there was not an issue. By August there appeared to be some genuine
concern. The response to that was to ensure that was going to
be discussed fully and properly within the Bank and indeed that
is what started to happen. I cannot answer your question about
who put it into the press and why they put it into the press,
because I do not know the answer to that. As far as we were concerned
when that went into the press, a series of meetings was already
scheduled, discussions had already taken place, more were to take
place, there was something which was a process we could see was
leading to a solution. So we do not feel we were late into it,
nor that anything serious had gone wrong, other than versions
of what went wrong, what was in the press and I fully agree with
you that it was very, very lamentable, because nobody ever wants
to run their business through the columns of a newspaper.
8. I thank you for that reply. May I follow
that up by asking you to say something about the formal arrangements
for the MPC to determine collectively the priorities for research
and analytical work which you talk about in page 28 of the annual
report? Can you say something about what those formal arrangements
are and how they operate?
(Baroness Noakes) As I understand it, there is an
annual cycle to that. There is a formal process of setting those
priorities once a year where the MPC take part in discussions
with the staff from Monetary Analysis division (MA) and people
are putting forward different projects and there is a process
of collective prioritisation to decide what the priorities should
be. Every quarter, at the end of the inflation forecast round,
there is a separate meeting, again the MPC with staff from MA,
which asks what the issues are where real progress can be made
by the next forecast round, which is the short-term research.
Between the two there are some things which you know you cannot
solve in one forecast round which will run a little longer. I
do not know whether I can help beyond saying that as I understand
it, it is a fully collective process involving all members of
the MPC and relevant staff of the Monetary Analysis division of
(Mrs Heaton) It is a formal process in that the MPC
members meet on a regular basis to discuss the research priorities.
9. The only reason I asked this question is
because it was the Court which introduced these arrangements.
What I do not understand is how you monitor these arrangements
and how you pick up any concerns and whether or not you have any
role in resolving any disputes. I understand it is collectively
done by the MPC, but this is a system which you put in place.
I should like to know what role you have in monitoring the operation
of the system you put in place.
(Baroness Noakes) We approved that system being put
in place, which was the process of the many discussions which
took place largely between the MPC members themselves. That was
something carved out from that process and we approved that as
a way going forward. We review that formally once a year because
that needs to lead into our annual report. As I mentioned to you,
one part of that process is for me to see every single member
of the MPC individually to make sure there are no individual concerns
which are not surfacing in a collective discussion. In addition
we see the MPC members every month at Court; not all attend every
month but a lot do attend most months. We see them then and have
an informal opportunity to hear whether there are any particular
concerns about what is happening. We also meet them on other occasions
as well. It is a combination of the informal interaction with
members of the MPC, all of whom we know well because we see them
regularly, and a formal review once a year. In addition I know
that several members of the MPC would have no trouble in calling
me if they wanted to discuss a particular aspect because they
have done that in the past; in particular when there was a discussion
about level of resources a couple of them did phone me directly.
I do not find that there is an absence of channels.
10. I find that a very helpful answer. Could
you just tell us what happens if you get a call from an individual
member? I am talking hypothetically of course, if you got such
a call and the individual member or the members who rang you said
frankly they were outnumbered and they wanted more work done on
hedonic pricing or whatever it might be. You get the call. What
role do you and the Court have in trying to resolve that, because
someone comes to you and says they are actually a minority in
the MPC, collectively the rest do not want this work to be done
and they think it is absolutely critical? Is there a role for
the Court in that?
(Baroness Noakes) That bit is really quite hypothetical
because I think you are saying there are four external members
and five bank managers and there is a ganging up. In my experience
there has been no sense of that. I have never had it suggested
that there is a Bank view, for example on research.
11. No, no, you misunderstand me. I am not talking
about people ganging up. I am just talking about one or two or
maybe three members of the MPC who want a bit of work done and
it is viewed as not being especially important, not a good use
of resources. They come to you, they ring you up and they say
they do not think it is right. Do you have a role or not, or can
you just be someone on the end of a phone?
(Baroness Noakes) I should try to find out what the
nature of the real problem was. I would go to see them or arrange
to see them next time I was in the Bank or whatever, or any one
of my colleagues would, because it is not just me who talks to
members of the MPC, we all interact with them. If you take the
research issue, the arrangements which were put in place last
December were designed to deal with that point, which is that
for the collective resource the Bank has at the disposal of the
MPC there is a collective prioritisation process. If members have
things they particularly want to do like hedonic pricing and the
rest of them do not, that is why they now have dedicated resources,
one junior and one senior economist each, for each member of the
MPC available to them to do their particular research needs. There
may come a point where they say to us that they need more to do
their particular research but they have not done that.
12. Those are individual researchers who are
dedicated to each member.
(Baroness Noakes) Yes; absolutely. They are designed
to meet those research requirements identified by individual members
which do not fit in with the collective prioritisation as set
by the MPC as a whole. What I am trying to say to you is that
question should not come to me.
13. That is helpful. So an individual member
may have a particular interest which is not necessarily shared
by the rest of the MPC in their collective discussions, but nevertheless
can use the full-time resource of two researchers.
(Baroness Noakes) Yes; two researchers.
14. On that non-collectively agreed bit of work.
(Baroness Noakes) Absolutely.
15. That is very, very helpful. Are you aware
of any concern among MPC members about lack of work being done
on the new economic paradigm, the new economy and all that huge
amount of research which will have to be done by someone sometime?
Are you aware of any complaints that not enough is being done
by Bank economists on that topic?
(Baroness Noakes) No, I am not aware of that. I do
not know whether my colleagues are. It is a big issue and it is
talked about a lot. I have not heard that complaint.
(Ms Blow) There is evidence that a lot of work is
going on to try to bottom this out so they are focused on that
as an issue but there are no complaints.
(Mrs Heaton) I would say not a complaint but debate.
It will be one of the things debated by the MPC as to the priority
to be given to that element of research. To the extent individuals
think that agreed line is not enough, then they will devote their
own resources to supplementing that. They have to debate that
in the MPC and see whether they win the day.
16. Are you aware that any individual members
have actually decided to commit their own personal research effort
into new economic paradigm research?
(Mrs Heaton) I am not aware of the individual priorities.
(Baroness Noakes) I do not know what they are working
(Ms McKechnie) I may be wrong but I think there is
a specific research group which has been set up under DeAnne Julius
which is looking at that whole area.
17. Is that using just her individual researcher?
(Ms McKechnie) No, I do not think so.
(Baroness Noakes) We will have to ask the Bank for
an answer to that.
Chairman: Perhaps you would drop us a
note on that.
18. It is the case therefore, judging from what
you say, that you do not specifically monitor the individual research
efforts of MPC members and you leave that to their discretion.
(Baroness Noakes) Absolutely.
Mr Ruffley: That is a very helpful set
19. In the Bank annual report in 1999 you flagged
up that the number of staff working in Monetary Analysis was targeted
to rise by 20 but only rose by 13. By the following year the report
is not only flagging up this same deficit but also flagging up
that the average level of experience is not perhaps what you might
have expected. How concerned are you about the lack of experience
of staff in this area in terms of supporting the MPC?
(Baroness Noakes) When we last looked at it, which
was last month or the month before, the numbers recruited to MA
were now satisfactory in terms of economists. There may be some
gaps in some support areas but in terms of economists the numbers
are there. Of course if you have a big recruitment programme and
get numbers, that often means you have younger staff, certainly
less experienced in Bank terms. The issue now is to try to retain
those staff, to keep them so that the experience level will increase.
Much of the anxiety about that situation has at least temporarily
disappeared and we are hoping that by the time we do the report
this year, that is when we get to the end of February, we shall
be able to report on a situation which is more positive though
not without problems, because you correctly highlighted the nature
of the younger profile of the less experienced. That is something
the Bank needs to manage, it needs to manage to hold those people
so that in a couple of years' time that will not be an issue either.