Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 40 - 59)



  40. That includes you.
  (Baroness Noakes) Yes, that includes us.

  41. One of the things you do is review the use of sectoral information. How are you setting about doing that?
  (Baroness Noakes) We formally review once a year the nature of sectoral information which is provided to the MPC. Each of us attends one of the pre-MPC meetings, which is one of the main sources of data flowing to the MPC. This is a meeting the preceding Friday. We each attend once or possibly twice a year to look at how that actually works in practice and how the sectoral information flows out. Those pre-MPC meetings include the reports of the agents and in addition we review formally once a year the work of the agents. In addition many or most of the non-executive members of Court go out to the agents to see how sectoral information is collected and then disseminated further through the ranks. We keep that under review. Then, when I ask each individual MPC member once a year their views in particular, one of the particular questions is their comments on information which is provided, in particular regional and sectoral information which is necessary for the formulation of monetary policy, because that is what we have to bear in mind. Then there is a discussion about those issues there. That is what we do, unless anybody can remember anything else we do. We try to keep under review what they do and then have a discussion with the individual MPC members about what it is they get and whether it is enough.

  42. Do you feel from the evidence that they are doing a good job and that they are indeed reviewing all sectors and are giving all sectors adequate consideration in reaching their decisions?
  (Baroness Noakes) They get a lot of sectoral information. I could not tell you exactly what they get but it is a vast amount of sectoral information which flows through that process on a monthly basis. If you see the agents' reports, for example, they analyse by sector.

  43. Do you listen to the view of any of the bodies or groups which represent business sectors? Do you gather their opinion as to whether they think they are being sufficiently consulted and listened to by the Bank and its agents?
  (Ms McKechnie) We have gone out and held a number of meetings in the regions, and linked to those meetings we have been invited to speak to local industrialists of various kinds. That is one way all of us can try to keep in touch with that. We have all conducted visits to one or other of the regional offices. We have met with the agents and people they bring in for discussion. In that sense you get a very much better picture. However there is only one interest rate which is set nationally and it is not a regional interest rate.

  44. I was going to come to regions in a minute. I am just focusing on business sectors at the moment. Let us take an example. What do you find is the feeling of agriculture? Do people in agriculture feel that their sector's problems are known, understood by the Bank and reflected in the decisions it takes?
  (Mrs Heaton) When the MPC was first set up there did not seem to be particularly much reference to agriculture and it was a question which I raised. In fact agriculture is specifically covered in the agents' reports and agricultural information being one of the sectors, all the normal statistical data which is collected for that sector gets fed into the MPC. Yes.

  45. Do you know whether the MPC specifically considers the situation in agriculture when it needs to set interest rates?
  (Baroness Noakes) It has one inflation rate target and one interest rate mechanism to use.

  46. Yes, but it is not gathering all this sectoral information for fun. Presumably it is doing something with it and it is informing its decisions.
  (Baroness Noakes) It is for them to understand what is happening in the whole economy. It needs to understand the components to understand the whole and that is why it gathers the information on the different sectors to try to understand what is happening in the whole economy. The focus being that I believe the MPC regards the information they get as adequate. There are some areas where they would like more information. It is probably well known they would like more information on the service sector and they have had several conversations with the ONS to provide better information on the service sector. It is something they keep under review, but if you look at it they get very, very significant sectoral information.
  (Ms McKechnie) Traditionally sectoral information has been collected very well. It seems somewhat odd though that you choose agriculture because it is such a small percentage of GDP in terms of the overall functioning of the economy. The bigger issue is whether the changes in the economy, the new economy, mean that some of the data sets which need to be looked at may have to be developed in order to analyse the impact of the new the economy or perhaps new data sets need to be set up which can track this over time. A great deal of research is going on into that within the Bank. This is the question you posed earlier and there is a great deal of speculation outside the Bank. I do not think it is an area—I defer to my economist colleagues—where there is a great deal of consensus about how you measure the new economy. That is a subject of considerable controversy and debate. I certainly personally have no answer to that question and I do not think we have as a group.

  47. The purpose of choosing agriculture is that if the Bank's sectoral gathering processes are sophisticated, then it will pick up what is happening in the small sectors of the economy.
  (Baroness Noakes) Yes, it does.

  48. It is easy to know what is happening in the big sectors and they could dominate all of its thinking. But if it is good data collection and analysis, then it listens to the small sectors. That is all.
  (Baroness Noakes) It also needs to be proportionate to the decisions actually made.

  49. Of course.
  (Mrs Heaton) There are the two elements: one is the statistical information coming in and the other is the anecdotal. For example, when Court met in Edinburgh, the Governor and I went and visited the Scottish NFU and heard the representations they made. We do try to get that sort of information. One might argue that statistically that was not a proportionately good use of the Governor's time but he did make sure that was covered.

  50. I was then going to come onto regional but you have started to take us onto it.
  (Mrs Heaton) They do come together.
  (Baroness Noakes) It is the same issue.

  51. I understand that. You are also monitoring the gathering of information from the various regions of the economy and again interest rates are not set for regions but different regions find themselves in different circumstances. From your knowledge of this are you satisfied that the Bank does satisfactorily gather the views and the data on all the regions of the United Kingdom economy?
  (Baroness Noakes) Certainly the data. The views of regions is something which as such does not feed in, although the views of individual businesses operating in different regions are fed in in effect through the agents' returns. The views of businesses within regions come up through the agents' returns and there are quite a lot of regional statistics which come out of the ONS which are included in the data analysis which is put together for the MPC every month. I am not aware of any major gaps in that.
  (Ms McKechnie) We did make a change and I cannot remember when we did it. We wanted the disaggregated data from the regions on a regular basis and not the aggregated data.
  (Baroness Noakes) I think you are referring to the information that Court wanted. That data was already going to the MPC but we said we should like to look at it too.

Mr Davey

  52. May I go back to the Kohn report? You decided to commission this and you set the remit for it. Were you satisfied that this remit went wide enough? If you were to recommission it, would you want to give a future external reviewer a broader remit?
  (Baroness Noakes) I do not think so. We had a pretty wide remit. We wanted to get an external perspective on how the procedures we keep in view broadly work and in particular the quality and type of analysis which was done by MA to support the MPC, to make sure they were getting best in class. That was the direction of the work so far as we were concerned. Certainly when we reviewed it with Don Kohn, he did not come and say he wished we had asked him to do something else. I think we were happy with the scope but do you have any particular concerns?

  53. It seemed to touch on four main areas: research, the arrangements for briefing, the forecast process and the relationship between staff and MPC. To my mind those were not necessarily comprehensive features of the process of the MPC. I may be harking back to our previous discussion, but clearly the decision process is an important process for the MPC because that is where the decision comes from. That is where outside academic research tends to focus in on and that is not in the remit and I just wondered why.
  (Baroness Noakes) We asked him to look at some of the things we normally look at and those were the areas we wanted him to focus in on. He obviously had the opportunity to talk to all members of the MPC about how the decision-making process actually worked, but we did not include that particular bit. We were actually much more concerned at the time we set it up to be clear that the right sorts of analysis were being done, that the forecast was being approached in the right sort of way because we did not have any benchmarks ourselves to be happy on that. In addition we wanted him to look specifically at the interactions between the MPC and staff because we were aware that was one of the areas which had caused concern around the time we discussed earlier, when additional resources were made available to the external MPC members. We were focusing on the things we felt in particular we wanted help on.
  (Ms McKechnie) We were very clear that we were not asking for him to look at the basic structure because that is a matter for the Chancellor and the Treasury. They have set up a particular process with particular institutional responsibilities and defined the roles of MPC members. We asked Don to take those as a given. If you compare that to the kind of academic interest in the Bank's process, of course you would say it is a very small subset, because what is fascinating academics about the MPC is the whole process, its openness, the way it has been structured. Most of the academic speculation I have read is not to do with the areas we are specifically tasked to undertake. It is much more on the broader framework and the issues which are essentially political and lie with the Treasury.

  54. I can see why you would not want to look at that aspect of it. Clearly the Chancellor and Parliament has to accept the structure. If you are looking at and reviewing the process of the committee which makes decisions about interest rates, I am just surprised that you are confining yourselves or focusing primarily on some of the inputs into those decisions, that decision-making process—they are important, of course they are—but not actually looking at the decision-making process itself. Maybe I am missing something. I just find it very difficult to understand how you can review the procedures without looking at the decision-making part of the procedures.
  (Baroness Noakes) We are looking at most of the procedures.

  55. But not the decision-making.
  (Baroness Noakes) That is probably because we had no concerns about those processes. As I have been trying to say earlier, there have not been any concerns. They are fully written up and explained, how it works, how discussion took place on the Wednesday afternoon and how they start Thursday and how they actually make the decision. That has been well explained and there does not appear to us to have been any questions either externally or more importantly internally about the efficacy of that process in terms of setting the rates. It was not top of our priority.

  56. Can you imagine yourself coming round to look at this part of the procedure?
  (Baroness Noakes) One never says no to anything.
  (Ms McKechnie) None of us really understands what you are getting at. What would we learn from that process that we do not know already? We could learn that one member of the MPC has a particularly aggressive style of questioning. What else would we learn from sitting in?

  57. I do not know because I have not sat in on the MPC.
  (Ms McKechnie) That is what we are struggling with.

  58. May I respectfully suggest that you might learn nothing but it is your job in the statute, as I read out, to look at the procedures and therefore part of that. It seemed to me that by writing Kohn's remit in this way you were preventing him from looking at it and you have not looked at it, so my follow-on question really is, to put it another way, whether or not you might commission someone else who might have a slightly different remit which might include the decision-making process.
  (Baroness Noakes) Perhaps we should keep that for when we commission the next external review. I am not sure when that will be, but I imagine we would do another similar exercise. One cannot keep picking it up by the roots and looking at it every six months but I imagine we should take that into account when we next have an external review by someone of the stature of Don Kohn, to see whether there is a way which can be found of meeting the concerns of the MPC and also what I see as your concern, which is feeling it is a bit of a black box at the moment and needing to see inside it.

  59. May I come back to the report itself and what he did actually say within the remit you gave him? His substantive points were about inflation forecast and that process and he reported on the other three areas I mentioned but he focused mainly on the inflation forecasts. You were quite right, I now see from my notes that the game playing was on the assumptions of the forecast, but he was concerned about this and he put forward five different methods of forecasting. What view is the Court going to take on that or do you feel it is not right for you to take a view?
  (Baroness Noakes) Our view as non-executives is that the MPC needs to keep the points made under review. When Don Kohn looked at this area it was not as though it was an area which was not the subject of much discussion within the MPC. It had been. Don Kohn put forward five possible ways forward, of which, when we talked to him privately, he viewed the fourth and the fifth as being in practical terms the most likely ways forward, which are the median forecast and the view of the majority. He thought those were potentially the best ways forward. The MPC has responded by saying that they are trying to communicate the centre of gravity of the forecast and they have added additional materials, trying to explain that, partly in the August inflation report and again in the November inflation report. They are trying constantly to explain what this forecast is. Recognising that it is extremely difficult with nine independent members of the MPC, individually accountable for their votes ultimately and also against that communicating the collective view of the MPC. Don Kohn's view was that there was no easy answer to that. The MPC have looked at it, have tried to explain some more and broadly come to the view they will keep this under review. They recognise that it is not something they have a perfect answer to. They have their best attempt at it at this point and for us them keeping it under review is the best procedure, it is not saying there is an end to it.

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