Examination of witnesses (Questions 40
TUESDAY 12 DECEMBER 2000
MS B BLOW,
GIBSON, CBE, MRS
F HEATON, and MS
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
(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
(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 areaI defer to my economist colleagueswhere
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
(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
(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.
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
(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 processthey are important, of course
they arebut 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.