I Introduction
1. The establishment of an operationally independent
central bank was the first major policy decision announced by
the Chancellor when the Labour government took power in May 1997.
The Chancellor set out a framework whereby he would continue to
set the objectives for monetary policy, in the form of an inflation
target, but the Bank of England, and in particular a nine-member
Monetary Policy Committee (MPC), would be given immediate operational
responsibility for setting interest rates to meet the inflation
target. The arrangements were initially put in place on a non-statutory
basis before being given legal backing on 1 June 1998, when the
Bank of England Act came into force.
2. The Act mandates the MPC to "maintain price
stability and, subject to that, to support the economic policy
of Her Majesty's Government, including its objectives for growth
and employment."[1]
Throughout the course of this Parliament the Chancellor has defined
price stability to be an annual rate of increase of the Retail
Price Index excluding mortgage interest payments (RPIX) of 2½
per cent. In addition, the Act ensured a greater degree of transparency
in decision making by requiring the publication of the MPC's minutes
and individual voting records. The Act also re-structured the
Court of the Bank to make it more representative of the whole
of the UK and to take account of a broad range of industrial and
business sectors.
3. The MPC is accountable to the Government for its
remit, to the Court for its procedures and to Parliament for all
aspects of its operations through regular reports and evidence
given to this Committee and the House of Lords Select Committee
on the Monetary Policy Committee. This report is our assessment
of the performance of the MPC over the course of this Parliament,
analysing both its performance against target and the framework
in which it works. We also assess our own role in the process.
In preparation for this report, in addition to our regular hearings
with the MPC, we also took evidence from some of the Non-executive
Directors of the Court of the Bank of England (NEDCo), and a range
of experts on monetary policy, including some former members of
the MPC. We would like to thank all those who gave evidence, in
particular Mr Don Kohn, of the US Federal Reserve, who travelled
from America especially to give evidence to the Committee, and
our specialist advisers, both past and present, on monetary policy,
Professor Charlie Bean, Mr Roger Bootle, Professor David Miles,
Ms Bridget Rosewell, Professor Andrew Scott and Mr David Walton.
4. The report is divided into four sections. First,
we set out the methodology we intend to follow in making our assessment
of the MPC and apply it to examining the performance of the MPC.
Secondly, we analyse the various components which make up the
broader monetary framework. Thirdly, we assess our own performance
in meeting the objectives we set ourselves at the beginning of
the Parliament. Finally, we look at wider economic policy issues
which have arisen over the last four years.
1 Bank
of England Act 1998, section 11. Back
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