NINTH REPORT
The Treasury Committee has agreed to the
following Report:
THE MONETARY POLICY COMMITTEE—AN
END OF TERM REPORT
Summary of Conclusions and Recommendations
Assessing the performance of the Monetary Policy
Committee
(a) We note that since
their inception the MPC have been working in a relatively benign
economic environment; however, we also recognise that they have
played a part in helping achieve these conditions (paragraph 6).
(b) Given the volatility
of inflation in the UK over the last 25 years, the MPC's record,
as measured by their performance against target, is impressive
(paragraph 7).
(c) We commend the
MPC on establishing a high level of credibility; however we are
concerned that in an effort to establish such credibility the
MPC may have biased policy towards undershooting the target. We
would therefore remind the Governor of his assurance to us, in
November 1998, that the MPC will be "just as active, rigorous
[and] aggressive in pursuing inflation at 2.5 per cent if there
is a balance of risks on the downside as we had been on the upside."
(paragraph 12).
(d) We note that the
MPC has performed well in meeting its secondary objectives of
supporting the Government's policies for growth and employment
(paragraph 15).
(e) We believe it
was correct to require each individual vote to be recorded but
note that so far differences in the broad voting patterns are
minor (paragraph 18).
Assessing the monetary framework
(f) It is perhaps
a measure of the success of the monetary framework that there
is now broad political acceptance of it (paragraph 19).
(g) We do not see
the need for individually attributable explanatory paragraphs
in the MPC minutes. We believe that differences of view between
MPC members, and their wider thinking, can be explained in public,
including in our evidence sessions (paragraph 21).
(h) We commend the
Bank on the way in which it has sought to disseminate information
on the policy and actions of the monetary policy committee. However,
as we noted in paragraph 10, public expectations of the inflation
rate remain approximately a percentage point above the target
and hence we would encourage the Bank to continue to think of
ways in which they can broaden the reach of their information
campaign (paragraph 22).
(i) We agree with
Mr Kohn that "the inflation forecast and Inflation Report
are key elements in making policy under the inflation target set
by the government and in explaining the policy to the public."
We also note Mr Kohn's point that "the forecast round and
Inflation Report may not be as helpful as they might be".
We recommend the MPC review the current arrangements (paragraph
27).
(j) We recognise that
there are a number of theoretical criticisms of the MPC's forecast
assumption of unchanged interest rates. However we think that
it provides the most easily understood framework for assessing
future policy developments (paragraph 30).
(k) We would like
to see more commentary in the Inflation Report on UK inflation
as measured by the Harmonised Index of Consumer Prices (paragraph
31).
(l) We do not think
that at present it would be appropriate to change the level or
measure of the inflation target (paragraph 32).
(m) We agree that
MPC members should be chosen as experts in monetary policy. However,
we believe that there is an advantage in these experts coming
from different backgrounds; and we note that one member of the
MPC has a business background and another is a well known labour
market economist (paragraph 33).
(n) We welcome the
consideration the MPC give to reports from the regional agents
and emphasise their importance (paragraph 34).
(o) We recommend that
the MPC should reconsider its decision not to hold meetings outside
London, as we think the symbolic benefits would more than compensate
the logistical inconveniences involved (paragraph 35).
(p) We repeat the
recommendation made in our report on the Accountability of the
Bank of England that the duration of the terms of office of MPC
members be increased (paragraph 37).
(q) We believe that
the Non-Executive Directors need to be much more pro-active in
ensuring that the procedures of the MPC operate fairly with respect
to both internal and external members (paragraph 40).
The role of the Treasury Committee
(r) We accept that
individual questioning is very important for accountability and
we recommend that our successor Committee ensures that over the
course of a year each MPC member is called to account in this
way (paragraph 45).
(s) We agree it is
important that the Treasury Committee is adequately staffed and
that the House provide sufficient resources to enable us to continue
to recruit and retain suitably high calibre specialists (paragraph
46).
(t) We recommend that
our successor committee continue to consider whether further explanatory
work by the Bank on the monetary framework would be beneficial
to Parliament and the general public (paragraph 48).
(u) We still believe
that confirmation hearings should be put on a statutory basis
(paragraph 49).
(v) We think that
confirmation hearings, even on a non-statutory basis, act as a
stimulus to the Chancellor to choose candidates who are competent
and independent. We also believe that our questionnaire and hearings
provide essential information about the background of the appointees
which is not otherwise readily available. Above all, the hearings
underline the fact that MPC members are accountable to Parliament
and to the public (paragraph 52).
(w) We think it is
vitally important that MPC members are able to express themselves
well in public and withstand robust questioning, as they will
undoubtedly face this both from within the MPC and from the general
public (paragraph 54).
(x) Any candidate
who is worth a place on the MPC should have the expertise and
ability to withstand responsible questioning from our Committee.
If the prospect of a confirmation hearing puts the candidate off
from applying then he or she is probably not suitable for the
post in the first place (paragraphs 54 and 55).
Wider policy issues
(y) We believe that
the responsibility is on us to continue to probe the advice which
the Treasury gives the MPC by questioning the Chancellor and the
Treasury Representative (paragraph 59).
(z) The strength of
sterling has had a disproportionately severe effect on the manufacturing
sector of the UK economy, with many companies finding it difficult
to remain competitive, particularly in European markets (paragraph
60).
(aa) We support the
MPC's stance on how it accounts for exchange rate movements in
its policy deliberations but we also question whether the MPC
are learning from developments in the economy as quickly as they
should. If they had changed their exchange rate forecast assumption
earlier, it is possible that interest rates would have been cut
earlier and inflation might not now be undershooting the target
(paragraph 64).
(bb) We believe that
the "new economy" and its developments are one of the
key issues facing economic policy makers over the next few years
and we expect the Bank to monitor the issue carefully. Our successor
Committee may wish to pursue this issue further in the next Parliament
(paragraph 67).
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