GOVERNMENT RESPONSE TO THE TREASURY COMMITTEE'S
NINTH REPORT, SESSION 2000-01: THE MONETARY POLICY COMMITTEEAN
END OF TERM REPORT
Assessing the performance of the MPC
(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% if there is a balance of risks on the downside as we had
been on the upside" (paragraph 12).
Since the inflation target is symmetric, the best
way of establishing credibility is to remain as close to the target
as possible. The MPC has a strong track record. RPIX inflation
has been very close to target since May 1997; over that period
it has moved within a narrow range of 1.8-3.2 per cent and has
averaged 2.4 per cent.
(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).
The Government welcomes the Committee's support for
the publication of individual voting preferences, as required
by the Bank of England Act 1998, section 15(4).
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).
The best indicators of the success of the new monetary
framework are low and stable inflation and interest rates and
the enhanced credibility of monetary policy shown by low inflation
expectations. Its widespread acceptance shows the new framework
(h) We commend the Bank on the way in which
it has sought to disseminate information on the policy and actions
of the MPC. However, ... 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).
The Bank's information campaign is a matter for the
Bank. With regard to the issue of monetary policy credibility,
as measured by public expectations of inflation, the following
points should be noted:
the main way in which the MPC can entrench
credibility is by establishing a good track record on inflation;
financial market expectations of inflation
indicate the MPC's success in establishing credibility, as the
(l) We do not think that at present it would be
appropriate to change the level or measure of the inflation target
In his 2001 Budget speech the Chancellor announced
that the inflation target will remain at 2½ per cent RPIX
inflation. While the inflation target is set every year, the Chancellor
believes that, at this stage, for reasons of consistency and stability
it is best to maintain the 2½ per cent target.
(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
Consistent with the Bank of England Act 1998, external
members of the MPC must have expertise or experience relevant
to the Committee's functions. While the MPC is a committee of
economic experts, not of representatives, the Government recognises
that a diversity of experience is desirable.
(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
There is a balance to be struck between terms of
appointment long enough for MPC members to develop familiarity
with the Committee's procedures but not so long that high calibre
candidates might be deterred from accepting appointment as an
MPC member. The Government notes the Committee's recommendation
but remains of the view that threeyear terms, with the possibility
of renewal, strike the right balance.
(q) We believe that the nonexecutive directors
need to be much more proactive in ensuring that the procedures
of the MPC operate fairly with respect to both internal and external
members [of the MPC] (paragraph 40).
The Bank of England Act gives the subcommittee of
the Court's nonexecutive directors responsibility for keeping
the procedures followed by the MPC under review. It is required
to report on them in the Bank's Annual Report. Ensuring the MPC
operates fairly with respect to both internal and external members
falls within nonexecutive directors' responsibilities under
the Act. The Government is confident that the nonexecutive
directors will ensure that the issue of fair treatment of all
MPC members is kept under review.
The role of the Treasury Committee
(u) We still believe that confirmation hearings
should be put on a statutory basis (paragraph 49).
The Government sees substantial difficulties with
the Committee's proposal that confirmation hearings be put on
a statutory basis. It raises important constitutional issues which
go far wider than the Bank of England. It would therefore be more
appropriate for Parliament to consider first the issue of official
appointments and the role of Select Committees in general rather
than to legislate for confirmatory hearings for the MPC in isolation.
(v) We think that confirmation hearings, even
on a nonstatutory 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).
The Government is committed to appointing top calibre
candidates to the MPC, with appropriate expertise and independence.
(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).
The criteria for appointment to the MPC are clearly
set out in the Bank of England Act 1998.
Wider policy issues
(y) We believe 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
The Treasury sets the framework, but does not advise
the MPC on its interest rate decisions. The Treasury representative
provides the MPC with information on fiscal policy and on the
Government's economic policies more generally. It is for the MPC
to decide how to use the information it receives from the Treasury.
(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).
The Government understands the difficulties that
the strength of sterling has caused. Despite the exchange rate,
manufacturing output grew 1.6 per cent in 2000 as a wholethe
fastest annual growth rate since 1994.
Manufacturers are benefiting from the Government's
policies for economic stability: economic growth has averaged
2.7 per cent since May 1997, longterm interest rates are
around their lowest levels for 35 years and the UK is enjoying
the longest period of sustained low inflation since the 1960s.
As a recent CBI report noted: "The macroeconomic policies
pursued by the Government have succeeded in delivering a stable
and favourable economic environment" (The Future of Manufacturing,
(aa) We support the MPC's stance in 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).
The details of their forecasting assumptions and
procedures for changing them are a matter for the MPC.
HM Treasury, May 2001
1 The Treasury add, in a covering note: "Those
recommendations of the Committee which are not specifically addressed
in the response have either been noted or are a matter for the
Bank of England". For a full list of the Committee's conclusions
and recommendations, see pp vii-ix. Back