Select Committee on Treasury Twelfth Report


5  The Monetary Policy Committee as a body

Size and balance of the MPC

57. The MPC comprises nine members, with five 'internal' members (The Governor, two Deputy Governors, and currently the Executive Director for markets and the Chief Economist) and four 'external' members. 'External' members are formally Bank staff, but hold no position at the Bank other than their MPC membership. MPC members themselves saw no division between the externals and internals. Professor Besley assured us that "If you look at the debates that we [the MPC] have and the discussions and the different positions people take, I do not think they correlate at all well at the moment with internal and external".[159] Sir John Gieve, Deputy Governor of the Bank of England, also downplayed the idea of a divide between 'internal' and 'external' members, and reiterated that "The important thing is that each individual is coming to their own decision and their own personal credibility is on the line".[160] Ms Barker also told us that "I am not sure anybody is particularly institutionalised, even the Bank people".[161] Ms Barker said the advantage of external members was that "it enables the Chancellor to draw on people from a range of backgrounds, and in particular it enables him to add financial markets experience to the panel or, of course, business experience".[162] Ms Lomax welcomed the inclusion of 'external' members, telling us "We have had rather a lot of turnover on the Committee in the last year, but the idea of having new people come on is one of the most important ways in which the whole process keeps itself fresh".[163]

58. The Governor of the Bank of England defended the 'internal' majority on the MPC, "It is a Bank of England committee and it should be a majority of Bank of England staff on it".[164] He also confirmed that he would not want more than nine members of the MPC:

I do think that more than nine would run the risk of making the process much less effective because a conversation among the nine is a key part of it and to have many more people would run the risk, as I think happens in somewhat larger councils that set policy, that some people have more say than others; there may be inner deliberations that take place because a very large body is simply too big to have a sensible discussion.[165]

While he would accept slightly fewer members of the MPC, he warned "Suppose you were to change the numbers by one. I do not think it would achieve very much but there would be all kinds of commentary about whether a decision was a result of having one fewer person."[166] We support the retention of an MPC with nine members, comprised as at present of five 'internal' Bank of England staff, and four 'external' appointees.

Profile of external members

GENERAL REQUIREMENTS

59. The Bank of England Act 1998 states that "The Chancellor of the Exchequer shall only appoint a person … if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committee's functions".[167] Mr Barrell stated that it was difficult to find people for the role of MPC member, because academics were focussed on the long term, while financial market participants were focussed on the very short term. What was needed, in Mr Barrell's view, was someone equipped with the skill set to look at issues in the medium term.[168] Professor Congdon thought that members of the MPC should be equipped with an understanding of money and banking.[169] Mr Sanders said that the key criteria of an MPC member should be that they were both an excellent applied economist, and an excellent communicator.[170] Mr Saunders and Professor Chadha were not concerned whether MPC members had a City background, but whether they were, in the words of Professor Chadha, "good professional economists".[171] Professor Goodhart told us that the specification for a new external member should be that "the person involved is capable of achieving within a reasonably short time the ability to make a sensible and informed choice [of the interest rate to meet the inflation target]".[172]

60. Dr Sentance agreed that it was "good to have a diverse range of experience" and he thought "that people with a business background bring something to the Committee in terms of both understanding how businesses are reacting to things and also looking at some of the survey indicators that are actually quite important in tracking the economy".[173] In Dr Sentance's opinion, keeping a "balance on the externals between business, academic and financial experience would be a good thing".[174] Professor David Blanchflower, an external member of the MPC, thought that ensuring that all 'external' members of the MPC had a "good, solid training in economics, either from business or from academia, is a fundamental thing".[175]

61. Dr David Potter of the Court of the Bank of England told us that he thought the role of a good external MPC member "clearly requires expert knowledge as an economist, although I would not eliminate people with huge experience, such as Richard Lambert, in economic matters as a whole".[176] Dr Potter went on to explain that members of the MPC did not require economics PhDs to have value for the MPC. His second criterion was that "they do not do consensus", in that they were prepared and able to take on the responsibility of a 'one person, one vote' system.[177] Ms Amelia Fawcett, also of the Court of the Bank of England, similarly told us that "I would think it would be unwise for them all to be academics" and that therefore some having some external members of the MPC with financial experience would be critical.[178] Mr Lambert thought there was a need to have "around the table a group of people focused on a single goal, articulate enough to express their views on that goal, and … the notion that they do not all come from exactly the same background adds to the quality of the decision-making".[179] Mr Barber broadly agreed with Mr Lambert, and stressed that, because each member was responsible for their vote, "you need a balance of experience reflected by more than anything you need people with the capacity to cope with the wealth of data that needs to be analysed and assessed each month and the confidence to play an active part in the work of the MPC".[180] When asked about whether there was a need for good communicators on the MPC, Mr Lambert told us:

They all strike me as being a very articulate lot who have no hesitation about expressing their views. I think that is fine, actually. I do not think there are any at the moment but there probably ought to be some giant brains who can hardly speak they are so clever but they can just get on with cracking things, provided there is the right balance of other more jolly types around. I think that works quite well, actually.[181]

UNDERSTANDING ECONOMIC MODELS

62. Some witnesses pointed to the possible value of an 'external' member of the MPC with economic modelling experience. Professor Wren-Lewis told us that "I think it is very important that there should be someone on the MPC who essentially is involved in producing and using the kinds of models which the Bank's current model is a class of".[182] Mr Barrell agreed, although he stated that:

I think expertise would be of great value but at the minute I suspect, with such a complicated model, the Bank staff are at a significant advantage over most outsiders, including most of the people sitting at this table, because they know this toy much better, and it would useful to have somebody outside saying, 'You are actually wrong there and I can prove it'.[183]

Dr Julius told us that her view was "that certainly one or more should have real experience in using and interpreting forecasting models of the economy".[184] She also thought that, "with the current structure, particularly the central role of the forecast in the MPC process, it is quite difficult for a non-technical person to participate fully in that exercise".[185] Professor Goodhart also thought that "one of the roles of the externals ought to be to be able to challenge the bank model".[186]

63. Ms Bell disagreed, explaining that:

I am not sure one gains anything by having one person who can go through the nuts and bolts of the model. What one needs is that all the members understand the broad properties of the model and how it is put together and can hold the bank to account. There is plenty of technical expertise within the bank.[187]

Dr Sentance thought that "some familiarity with forecasting, which I have in my background and I know Kate [Barker] has, is helpful among the external members, but I do not think we should get hung up on the model as being the sole source of everything".[188] Mr Charles Bean, Chief Economist of the Bank of England, did not see the need to include such a person; he was concerned that the MPC might then concentrate too much on the detail: "I do not think it is essential to have somebody on the [MPC] who is familiar with the entrails of the model and in fact it might actually work against the [MPC] functioning well if the consequence was to keep on pulling us into peripheral details".[189]

CONCLUSIONS

64. It would be inappropriate to consider places being available for certain 'constituencies' among the 'external' membership of the MPC. For that reason, while we would welcome the appointment at some time of an 'external' member of the MPC with experience of economic modelling, we would not expect the presence of such a member to be a permanent requirement within the membership. However, certain attributes are important: a good understanding of economics, either via academic research or experience in the financial sector or business; a strong degree of personal independence and confidence; and, finally, the ability to communicate their view of the economy, both to specialist audiences and the general public.

Terms and conditions of 'external' members

65. Several submissions questioned whether the terms and conditions for 'external' members of the MPC were appropriate. The Bank of England Act 1998 states that 'external members' must serve three-year terms. No limit is placed on reappointment, and Ms Barker was recently appointed for a third term.[190] The terms and conditions of their appointment are determined by the Non-Executive Directors Committee of the Court of the Bank of England (NedCo). NedCo may also remove an external member of the MPC from office if they become bankrupt, are absent from MPC meetings without consent for three consecutive months, or are judged by NedCo to be unfit or unable to discharge their functions as a member.[191]

66. We discussed with witnesses whether the terms of 'external' members ought to be renewable, how long such appointments should last, and whether 'external' members ought to be allowed to work full-time. On the term of appointment, Mr Barrell agreed with Mr Steven Nickell's suggestion of a six-year term, without the possibility of renewal, because it took some time for people to adapt to the job.[192] A similar point was raised by Dr Wadhwani, in relation to time needed to get up to speed with the forecast model used by the Bank.[193] Professor Congdon was not keen on the idea of longer terms for members, suggesting it might dissuade those from a business background from joining. Professor Wren-Lewis was concerned about the implications of a six-year appointment if the new member was not up to the job.[194] While accepting that a three-year appointment means that those from different backgrounds are not excluded from the role, Professor Chadha suggested that a longer term of appointment, for three years extendable to six years, might insulate people from the effects of the political cycle.[195]

67. Ms Bell suggested that four-year terms, with no reappointment, might be a more suitable policy, with one external member leaving each year.[196] Dr Julius thought that there should be a three-year term, followed by another three-year term if both sides agreed, but with a total limit of six years, even for internal members. She raised two issues that underlay her opposition to a single five- or six-year term: first, the need not to be left with a member of the MPC who was not up to the job; and second, that some might not want to stay for the full six years, and the possibility of market comment if they left early.[197] Professor Blanchflower confirmed that, for him, a longer term would not have been feasible for his career. Professor Besley preferred a single-term of six years, with a minimum of three, and the option of extension being with the appointee.[198] Ms Barker also expressed an appreciation for the idea of a single six-year term, with the minimum of three years, as long as the appointee had not breached any part of the relevant sections of the Act governing appointments.[199] Mr Lambert accepted that a longer term, with no reappointment, would prevent political bias and allow someone to build up expertise but also noted that a longer term might mean some people would not want the job.[200] Mr Barber felt the current arrangements were "about as well balanced as you could make it".[201] Ms Fawcett felt that the current system had not prevented the Bank from attracting the right people to the job.[202] Dr Potter, however, had sympathy for the six- or five-year single term, with a minimum of three years, so that the appointments were truly independent.[203]

68. We are mindful of the need to ensure that the MPC remains independent, and to allow a flexible system of terms and conditions that can enable recruitment from the widest base. We therefore recommend that, should the Bank of England Act 1998 be modified in the future, a new term of office for 'external' MPC appointments be instituted, based on a six-year term, with no option of reappointment, with a three-year minimum, after which continuation would take place only with the agreement of both the Non-Executive Committee of the Court of the Bank of England and the postholder. This would give the flexibility to remove those who are unfit for the job, retain flexibility for those who might wish to leave the post early, and ensure continuation was not at the discretion of the Chancellor of the Exchequer.

69. On the question of whether the job should be full- or part-time, Professor Wren-Lewis said that being an 'external' member of the MPC could be a full-time job, but that the option of either working pattern ought to be left open.[204] Professor Muscatelli pointed out that it seemed to be that those from a business background that struggled with the part-time requirement, and that therefore there was an issue here.[205] Mr Barrell also suggested those from some occupations found it easier to move into the part-time mode of working than others.[206] Ms Barker felt that for those who had to give up all other work, the full-time option was attractive, and at the start of her time on the MPC, more time would have been useful, but as her experience increased, three days a week was adequate.[207]

70. Dr Potter said that the Committee of Non-Executive Directors of the Court of the Bank felt that a three day week "is an appropriate time to do the job … and there should be time spent in broader matters to keep abreast of things as a whole through their other activities".[208] He did not think that an extension to a full working week would attract those in the City who might be giving up large salaries to join the MPC. He told us "people take on the role because it is eminent and it is status-enhancing at the peak of their career to be appointed to the MPC. That is why they will join."[209] We find the explanations of why the full-time option was removed for all 'external' members unconvincing, especially for new members of the Monetary Policy Committee. We recommend that all working patterns be available to 'external' members of the MPC, so that they may undertake their duties as they see fit, as their career progresses.

Appointments

INTRODUCTION

71. The nine members of the MPC are subject to three different methods of appointment. The Governor and two deputy Governors are Crown appointments made by the Queen upon the advice of the Prime Minister. Two members to the MPC, one who has executive responsibility within the Bank for monetary policy analysis, and one who has executive responsibility within the Bank for monetary policy operations, are appointed by the Governor of the Bank of England, after consultation with the Chancellor of the Exchequer. The four external members of the MPC are appointed by the Chancellor of the Exchequer.[210]

APPOINTMENTS OF 'EXTERNAL' MPC MEMBERS

72. The evidence we heard on appointments mainly concerned those of 'external' members of the MPC. Mr Stephen Nickell had described the procedure as "opaque".[211] Mr Barber expressed frustration at the "extremely opaque" nature of the appointments process.[212] Professor Goodhart commented that "there is no information or attempt to give any specification about what is wanted. How the Chancellor and Treasury go about obtaining names and what the role of the Governor of the Bank is in this is simply unknown".[213] Lord George provided us with some background information on the process. He explained that the Bank had provided a list of potential candidates to the Treasury, which would be discussed with Treasury officials.[214] He told us that he "never felt particularly uncomfortable with the appointments process".[215]

73. Professor Wren-Lewis contended that the present system was open to abuse by the Chancellor of the Exchequer, although he said added that "this Chancellor has not done that but we cannot rely on Chancellors never doing that".[216] Mr Saunders also claimed that the process was vulnerable to the Chancellor of the Exchequer, and told us "one of the issues is whether a future Chancellor at any point would seek to change the … appointment process in a way which undermines the aim of inflation stability".[217] He thought there ought to be some sort of external source of short-list or check on candidates.[218] Dr Wadhwani also suggested the process was open to change by the Chancellor of the Exchequer.[219] Mr Lambert said that he thought the "there needs to be a degree of discretion for the Chancellor and, indeed, for the Governor in settling on the line-up of the team".[220]

74. Concerns were raised about the timeliness of appointments to the MPC. In Summer 2006, the MPC went down to seven members for two months, due, in part, to the untimely death of David Walton, the resignation of Mr Richard Lambert, and Stephen Nickell's departure after two terms all occurring around the same time. Lord George admitted that some "appointments were made pretty much at the last minute and I believe that as much as anything else that was because the Chancellor had an awful lot of other things to do".[221] Mr Barber also noted the lack of timeliness of some of the appointments.[222] Professor Muscatelli emphasised the important of avoiding the problems of 2006, and said that the appointments process should be speedier, perhaps by sounding out applicants in advance.[223] One suggestion to alleviate such problems was for a pool of candidates from which to draw MPC appointees. Mr Lambert thought it a good idea to "collate a bench of relevant experts who might be available, so that when an appointment needed to be made it would be possible to choose from a pool of people who were sort of up and willing".[224]

75. Dr Julius was forceful in her criticism of the present procedure, saying it had "not been very professional".[225] She suggested that there should be an open specification for the role, against which candidates could be judged. However, the names of the candidates should be kept confidential.[226] Professor Goodhart was also cautious about making names public prior to the announcement of an appointment.[227] Mr Barber highlighted the lack of a transparent mechanism for candidates to express an interest in the position.[228] He wanted "an appointments process that was more comparable to the kind of procedures that are used in other major public appointments, with a degree of openness about the application process and with a selection panel, potentially, which could include a wider range of expertise".[229]

76. The Court of the Bank of England undertakes scrutiny of the procedures of the MPC, and therefore we were interested to hear the impact of the lack of timeliness to the appointments. Dr Potter admitted that the Court, except through the Governor, had made no public admission of its dissatisfaction with the appointments process, but told us that there would be comment on it in the Annual Report, and that the Court had made its views know to the Treasury.[230] Dr Potter did tell us that he would agree with an open advertisement for the post of member of the MPC, but stated the reservation that such a search process was looking for "experts in their field".[231] Dr Potter later said that he thought there was "great merit" in part of the consultation process of appointments occurring through the Court.[232] The section of the Bank of England's Annual Report 2007 devoted to the report by the Non-executive directors said:

Non-executive Directors would support efforts to strengthen the process for MPC appointments … and to make them subject to normal public appointment procedures. This might also help to ensure that the balance of the MPC was maintained in terms of expertise and experience. The overriding purpose of any appointment is, of course, to recruit the best possible person for the job. Non-executive Directors are also conscious of the need to ensure that the terms and conditions of employment for external members of the MPC are competitive and do not limit the number of potential candidates.[233]

77. We raised with the Governor several possible changes to the appointments process, including an open advertisement, a pool of candidates, ensuring the Governor had input into the process and ensuring a timely system of appointments. He did not have an objection to an open advertisement for a confidential pool of candidates for an MPC appointment.[234] He agreed that it was important that the Governor could express a confidential view to the Chancellor of the Exchequer about the merits of certain candidates.[235] He agreed that there should be a time limit in which appointments could be made.[236]

78. The then Chancellor of the Exchequer, in his opening statement in evidence to us, outlined a new process for MPC appointments with several distinct elements. First, he responded to concerns about delays in appointments:

The timetable for replacing external monetary policy members will be pre-announced before the end of existing members' terms and that will establish a clear set of dates for each stage in the process, including by when the Government will have confirmed a new appointee.[237]

Next, he dealt with the challenge of attracting potential applicants for vacancies:

As part of this timetable and to enhance the openness of the process, the Treasury will … invite by advertisement expression of interest from economists and experts in other relevant backgrounds interested in serving on the Monetary Policy Committee, and these will be invited before the end of existing members' terms and early in the timetable for appointment whenever a position is due to become available.[238]

Third, he turned to methods of attracting the right applicants and choosing the right candidates in addition to the requirement upon him to appoint a person who "has knowledge or experience which is likely to be relevant to the [Monetary Policy] Committee's functions":

The Government will publish additional criteria on the qualities and skills set that it is seeking from successful candidates in terms of their expertise. In determining these criteria the Government will ensure that the composition of the [Monetary Policy] Committee retains an appropriate balance of different skills and backgrounds.[239]

The Chancellor of the Exchequer did not accept there was a case for the Governor of the Bank of England to select MPC members, telling us "I think some people are confusing the independence of the Bank of England with simply the position of the Bank of England itself in choosing its own members of the Monetary Policy Committee, and neither the Governor nor myself favour that particular set of proposals".[240] When asked why it had taken ten years for these changes to be made, the Chancellor of the Exchequer replied "It was important to establish a new system"[241] and that "it was also right to bed down the present system in a way that commanded confidence".[242] He also stated that the changes outlined introduced more accountability and transparency, and moved the UK system beyond the US Federal Reserve, or the European Central Bank.[243]

79. We welcome the changes to the appointments process for 'external' members of the Monetary Policy Committee outlined by the then Chancellor of the Exchequer in evidence to us in June 2007. We welcome the fact that Government will advertise for different qualities and skills for each new 'external' member of the Monetary Policy Committee. We hope that they will lead to timely appointments of experts suited to the role of Monetary Policy Committee member. We note that there is no current proposal for a confidential pool created of experts who could be nominated to the Monetary Policy Committee where posts need to be filled at short notice. We therefore recommend that the Government consider adding a note to candidates as part of the appointments process asking them if they would be willing to form part of such a pool if not selected for the current vacancy.

THE ROLE OF THE TREASURY COMMITTEE

80. Since 1998, the Treasury Committee in successive Parliaments has held appointment hearings with new MPC appointees.[244] The Committee's role does not have a statutory basis, and the Government has not generally undertaken to take any particular account of the opinions expressed about individual appointees. When asked whether the Treasury Committee's powers ought to extend to formal confirmation, Professor Congdon told us

The Americans have that and every now and again it is used. I would hope it would be used very rarely. You could give some input to the Chancellor and say perhaps these are the right sort of people or whatever.[245]

Professor Congdon thought that the Treasury Committee ought to be involved in drawing up a short-list of potential candidates.[246] Professor Muscatelli disagreed with the Treasury Committee having the right of veto, saying "I think it politicises the process too much and I think the public scrutiny that this then presents might have an impact on the financial markets".[247] Professor Chadha also did not want us to have a right of veto, again presenting the opinion that this could politicise the process.[248] Mr Saunders thought our hearing with new appointees were very important, but thought that a veto should only be allowed "if it was a very overwhelming vote of the Committee because otherwise you could get into a position in which you get political games being played".[249] Lord George expressed the concern that this was a technical appointment, and left us to judge whether we had the competence to make such a decision.[250] He also warned against adding a political element to it.[251]

81. The then Chancellor of the Exchequer promised to listen to our recommendations in this area, but reminded us of the intricacies of dealing with market sensitive information. He thought the role, where possible, of the Treasury Committee should be enhanced.[252] However, in a reference to the Treasury Committee having veto power, the Chancellor of the Exchequer referred to one occasion—the appointment of Mr Christopher Allsopp[253]—when the then Treasury Committee had asked the Chancellor of the Exchequer to think again about an appointment. He told us "I think probably in the [Treasury] Committee's considered view, his period as a member of the Monetary Policy Committee was actually a successful one".[254]

82. The Governor of the Bank of England told us that:

I know that normally your wish is for members to come here for a confirmation hearing before they start their work and that would be the sensible time at which to do it. What the world would look like with timely appointments would indeed be one in which you would have a chance to carry out the hearing before the individual joined the Committee.[255]

On 3 July 2007 the Prime Minister announced a series of reforms of parliamentary involvement in public appointments, some of which directly affect 'external' appointments to the MPC and responded to our concerns about timing. The Prime Minister proposed "pre-appointment" hearings for a nominee suggested by the Government, which would be "non-binding", but which would precede the formal appointment.[256] We welcome the Government's commitment to enable appointment hearings by this Committee for nominees for the post of 'external' member of the MPC to take place prior to formal appointment. We note that the Government considers such hearings would be "non-binding". We consider it important that such hearings can be scheduled sufficiently far in advance of the date of the formal appointment to enable the Chancellor of the Exchequer to be able to give proper consideration to any view expressed by the Treasury Committee without there being a danger of the MPC membership being temporarily reduced as a result of reconsideration of a nominee. We recommend accordingly that nominations be announced at least three months prior to the date on which the vacancy falls to be filled. We also consider that, if the Treasury Committee were to reach an adverse opinion on a nominee, which would only be after careful and considered reflection, the Committee ought to have the power to require a debate in the House of Commons on the nomination.

APPOINTMENTS OF 'INTERNAL' MPC MEMBERS

83. When asked whether he has also considered open advertisement for the positions of Governor and deputy Governor, the Chancellor of the Exchequer pointed out that not only were they MPC members, but also administrators, and warned that "I do think some of the proposals that are coming from other people fail to recognise that any decision about any appointment made to the Monetary Policy Committee is market sensitive and is likely to affect people's evaluation of the inflation expectations of the British economy or other aspects of the British economy, and I think this Committee will want to be very careful in its recommendations about what should change, knowing that that is the position".[257] The Government's recent announcement about appointments confirms the separate status of these appointments, which it is proposed will continue to be announced prior to a hearing before this Committee.[258]

84. We believe that the positions of the Governor and the two Deputy Governors should be recruited by open advertisement as well as confidential search.

Frequency of MPC meetings

85. The minimum number of meetings of the MPC in a year is set by the Bank of England Act 1998:

(1) The Committee shall meet at least once a month.

(2) The Governor of the Bank (or in his absence the Deputy Governor of the Bank with executive responsibility for monetary policy) may summon a meeting at any time on giving such notice as in his judgment the circumstances may require.[259]

While in both Canada and the United States of America, we heard strong support for a meeting cycle involving around eight meetings a year. In one of our meetings in Canada, this was described as allowing for "thinking time".

86. Ms Barker thought it would be possible to move to eight times a year, telling us "a natural alternative … would be to have the quarterly meetings around the Inflation Report and only one meeting in between".[260] However, she did acknowledge the argument that monthly meetings fit in with a monthly data cycle,[261] but went on to say that "news can creep up on you because you look at it month by month, so we always have to be very careful when we are meeting not just to say what has happened over the last month but what has happened over the whole period since we last moved interest rates".[262] However, she concluded by saying "if you were to ask me would it be much worse or much better if we were to meet eight times a year, I have to say I do not have a terribly strong view either way".[263] Dr Sentance was strongly in favour of the status quo, and told us that the pattern of regular meetings helps to "build confidence" and minimise the need for emergency meetings.[264] Professor Blanchflower agreed with Dr Sentance, and told us that "We do not want to be seen to be asleep at the wheel".[265] The then Chancellor of the Exchequer was also happy to remain with the current number of meetings, but stated that the change in economic circumstances meant that "you could probably afford to make a change, but I think the pattern we have is pretty well established".[266] We have heard differing views on the need for monthly meetings of the Monetary Policy Committee. With hindsight, it would have been better if the Bank of England Act 1998 had not mandated monthly meetings, but had left the number of meetings each year to be determined by the Court of the Bank of England on the recommendation of the Governor, but subject to the following conditions: that there were to be a minimum of eight annual meetings, that Monetary Policy Committee meetings were to be evenly spaced across the year, and that MPC meetings were to be pre-announced with a year's notice, except in 'emergency' cases. We therefore recommend that, should changes to the Bank of England Act 1998 be required for any other purpose, these changes be made at that time.

The role of the Court of the Bank of England

87. The Bank of England Act 1998 places certain responsibilities on the Court of the Bank of England, and the Committee of Non-Executive Directors (NedCo) within the Court, for the Monetary Policy Committee. NedCo has the responsibilities around the terms and conditions for new external MPC appointments discussed earlier in this Report. The Act also gives NedCo the following responsibilities:

(1) The court of directors of the Bank shall keep the procedures followed by the Monetary Policy Committee under review.

(2) In particular, the court's function under subsection (1) shall include determining whether the Committee has collected the regional, sectoral and other information necessary for the purposes of formulating monetary policy.[267]

88. When we asked our witnesses what the role of the Court was, Dr Julius, a former member of the Court of the Bank of England as well as a former MPC member, responded that "In some ways the court is a rather grand body with very little to do" and that "The role of court is not very well defined which I believe is a fault of the Act rather than either the people on the Court or the internal Bank of England people".[268] Ms Bell however disagreed, and said that "I believe the Act is quite clear about its role: it is to make sure that the MPC's procedures are there and it is getting the right sort of information" but she added, "It receives quite a lot of information. Perhaps it could make more of it".[269] Dr Julius agreed that the role of the Court appeared to be that of "a good shop steward".[270] Professor Besley seem to corroborate this, telling us that he had "attended two Court meetings, one Court lunch, a Court away day and a dinner to meet with the Court informally", and that he had "also met Sir John Parker [Chairman of NedCo] one-on-one" and it seemed to him "that the Court is at this point taking very seriously its job of settling in a new MPC member as I was, and checking that there are no issues that need to be dealt with".[271]

89. Dr Potter described the role of the Court:

Our general role in the Bank is the governance and oversight of the management of the Bank as a whole, and the Bank of course carries out many functions, including the implementation of monetary policy (that is the setting of interest rates) but the formulation of interest rates of course is the responsibility of the Monetary Policy Committee. Our role is to oversee that the processes and procedures there are working well and effectively.[272]

When presented with the earlier criticism of the role of the Court, Dr Potter felt this was an underestimation of the role of the Court, which he described as "absolutely essential".[273] He said that while the role of the Court with the MPC was limited, it was there when issues, such as with research or processes or procedures, needed resolving.[274] Ms Fawcett added that given her experience on other boards, the Court and NedCo seemed to have all the attributes of an independent board, and said "Whether it is setting strategy, financial objectives, monitoring the management of the Bank, it is very clear that that is what court does do, and I think does very effectively".[275]

90. We then discussed particular activities undertaken by the Court. Dr Fawcett described to us how the Non-Executive Directors Committee (NedCo) monitored the performance of MPC members. She told us there was an annual questionnaire and individual one-on-one meeting with the Chair of NedCo. There are monthly reports from the Chief Economist on how the MPC process is working, and informal meetings between members of the Court and members of the MPC.[276] NedCo is empowered by the Bank of England Act to remove MPC members not performing their duties.

91. We also discussed the structure of the Court, and the frequency of its meetings. Alhough the monthly meetings are required by statute, Ms Fawcett thought a smaller number may be more useful, and informed us that "A traditional board would meet anywhere between six and 10 times a year".[277] She also told us it would "make more sense" to have slightly fewer numbers on the board.[278] Dr Potter argued that around 12 members may be a better number.[279] On the number of meetings he told us that "I think there is something to be said for a regular routine".[280] He also warned that "There is a huge amount of work to do to ensure that one is fully knowledgeable about the activities going on in the Bank and the issues", and that he would suggest "You could argue to take it down to, say, nine; certainly 11 is appropriate with August free".[281] We believe that the present Court of the Bank of England is too large and should be reduced in size. We note the role played by the Court in the accountability process of the Monetary Policy Committee. We will continue to monitor the decisions of the Court, and at times may request additional information from it relating to the Monetary Policy Committee to ensure that it is undertaking its proper functions as related to the Monetary Policy Committee.

Resources

OVERALL RESOURCES

92. The Court is responsible for ensuring that the MPC as a whole had adequate resources to undertake its work. In undertaking that work, Dr Potter explained that the Court received an annual report from the Chief Economist about staffing and financial resources. He explained that current funding for monetary analysis was £61 million a year. He stated that the Bank's intention was to decrease the number of economists, but increase their overall level of experience.[282] While historically the Bank had been able to compete with the City to recruit the high calibre economists it needs. However, Dr Potter told us that the Bank's ability to retain them "is an issue in the long run, which we [the Court of the Bank of England] need to be concerned about".[283] Ms Fawcett also told us the Court receive quarterly performance reports from the Bank, which are extensively examined by the Court. On recruitment, she acknowledged the disparity between salaries available in the City and the Bank, but that traditionally this had not mattered, as "the Bank of England is an institution of the highest reputation and people are pleased to work there".[284] However, she noted that "Going forward, given the nature of the body, you are never going to be able to rectify the financial imbalance but there is something about whether we are properly structured and prepared for slightly more turnover and how we deal with a workforce that may come in and go out with a little more regularity".[285]

93. We continued this discussion with the Chief Economist of the Bank of England at his reappointment hearing. He told us that "It should be said that exit rates from not just monetary analysis but the analytical areas of the Bank in general have risen over the last couple of years reflecting the hiring that is taking place in the City".[286] More worryingly, he added "We have been losing some people I would have preferred to keep".[287] He confirmed it was a challenge for the Bank going forward, and stated that the Bank was trying to develop its secondment programme to enhance people's career opportunities.[288] We note with concern the questions raised by the Bank of England's Chief Economist about the ability of the Bank of England to retain its analytical staff, and we will continue to monitor this situation.

RESOURCES AVAILABLE TO EXTERNAL MPC MEMBERS

94. In 1999, the then Treasury Committee issued a Report on Research Assistance for Monetary Policy Committee Members after a public dispute about resources available to 'external' members. That Report cautioned the Bank to better manage such future disputes.[289] One of the roles of the Court of the Bank of England is to ensure that the MPC has adequate resources to undertake its work. The then Treasury Committee, commenting on the episode which led to the increase in resources to external members, concluded "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".[290]

95. We were therefore interested to hear the views of those who had been on the MPC on the resources available. Dr Wadhwani explained that "When I got there the quantum of resource was not enough but that was resolved". He told us that "There have been rumours around that there may be an attempt to take these resources back from external MPC members which I believe would be a retrograde step".[291] Dr Julius raised the concern that there in her time on the MPC, it would have been useful "even after the expansion of resources, [if there] was more modelling capability in the external MPC staff".[292] Ms Bell thought it would be wrong to "dilute" the resources available to external MPC staff, describing the resources available as "adequate" but not "overly-generous".[293] On the modelling capability available to the external MPC members, she felt that there was no reason why people with economic modelling experience could not be recruited to assist the external MPC members, and at times had been.[294]

96. Dr Potter outlined the procedure undertaken by the Court to monitor the resources required by the MPC. This included informal lunches, and a formal appearance by MPC members before Court every three months.[295] His present opinion was that their data told them that things were "pretty satisfactory".[296] He stated, on the question of whether there was going to be a reduction in the resources available to external MPC members, that "There is no such intention of which I am aware".[297] He also confirmed that MPC members had access to him if required to express concerns about resources.[298] We welcome the assurance given to us by the Court of the Bank of England that the resources available to external members of the MPC are not under threat. We will continue to monitor both these resources and the role of the Court in such matters.


159   Q 210 Back

160   Q 257 Back

161   Q 211 Back

162   Q 179 Back

163   Q 255 Back

164   Q 275 Back

165   Ibid. Back

166   Q 275 Back

167   Bank of England Act 1998, Section 13, subsection (4) Back

168   Q 41 Back

169   Ibid. Back

170   Q 83 Back

171   Q 84 Back

172   Q 152 Back

173   Q 209 Back

174   Q 225 Back

175   Q 224 Back

176   Q 326 Back

177   Q 327 Back

178   Q 329 Back

179   Q 379 Back

180   Q 380 Back

181   Q 394 Back

182   Q 39 Back

183   Q 40 Back

184   Q 154 Back

185   Q 153 Back

186   Q 164 Back

187   Q 156 Back

188   Q 234 Back

189   Q 277 Back

190   Bank of England Act 1998, Schedule 3 Back

191   Bank of England Act 1998, Schedule 3, paragraph 9 Back

192   Q 45 Back

193   Q 155 Back

194   Q 45 Back

195   Q 86 Back

196   Q 157 Back

197   Ibid. Back

198   Q 228 Back

199   Q 229 Back

200   Q 381 Back

201   Ibid. Back

202   Q 335 Back

203   Ibid. Back

204   Q 46 Back

205   Q 47 Back

206   Ibid. Back

207   Q 230 Back

208   Q 337 Back

209   Q 338 Back

210   Bank of England Act 1998, section 13 Back

211   Ev 20  Back

212   Q 381 Back

213   Q 165 Back

214   Q 101 Back

215   Ibid. Back

216   Q 50 Back

217   Q 79 Back

218   Ibid. Back

219   Q 166 Back

220   Q 383 Back

221   Q 101 Back

222   Q 382 Back

223   Q 49 Back

224   Q 383 Back

225   Q 166 Back

226   Ibid. Back

227   Q 165 Back

228   Q 381 Back

229   Q 383 Back

230   Qq 304-316 Back

231   Q 318 Back

232   Q 339 Back

233   Bank of England Annual Report 2006-07, p 42 Back

234   Q 268 Back

235   Q 269 Back

236   Q 270 Back

237   Q 408 Back

238   Ibid. Back

239   Q 401 Back

240   Q 409 Back

241   Q 413 Back

242   Q 415 Back

243   Q 413 Back

244   Treasury Committee, First Report of Session 1997-98, Accountability of the Bank of England, HC 282  Back

245   Q 52 Back

246   Q 53 Back

247   Ibid. Back

248   Q 82 Back

249   Ibid. Back

250   Q 102 Back

251   Q 103 Back

252   Q 411 Back

253   Treasury Committee, Seventh Report of Session 1999-2000, The Monetary Policy Committee of the Bank of England: Confirmation Hearings, HC 520 Back

254   Q 419 Back

255   Q 274 Back

256   HC Deb, 3 July 2007, cols 816 and 43WS; Ministry of Justice, The Governance of Britain, Cm 7170, July 2007, para 76 Back

257   Q 417 Back

258   Cm 7170, para 79 Back

259   Bank of England Act, Schedule 3, paragraph 10 Back

260   Q 220 Back

261   Ibid. Back

262   Q 221 Back

263   Ibid. Back

264   Q 222 Back

265   Ibid. Back

266   Q 450 Back

267   Section 16, Bank of England Act 1998 Back

268   Q 160 Back

269   Q 161 Back

270   Q 163 Back

271   Q 232 Back

272   Q 299 Back

273   Q 300 Back

274   Ibid. Back

275   Q 300 Back

276   Q 332 Back

277   Q 302 Back

278   Ibid. Back

279   Ibid. Back

280   Ibid. Back

281   Ibid. Back

282   Q 345 Back

283   Q 346 Back

284   Ibid. Back

285   Ibid. Back

286   Treasury Committee, Seventh Report of Session 2006-07, The Monetary Policy Committee of the Bank of England: re-appointment hearing for Ms Kate Barker and Mr Charlie Bean, HC 569-II, Q 3 Back

287   Ibid. Back

288   Ibid. Back

289   Treasury Committee, First Report of Session 1999-2000, Research Assistance for members of the Monetary Policy Committee, HC 43 Back

290   Treasury Committee, Ninth Report of Session 2000-01, The Monetary Policy Committee - An end of term report, HC 42 Back

291   Q 164 Back

292   Ibid. Back

293   Ibid. Back

294   Ibid. Back

295   Q 342 Back

296   Ibid. Back

297   Q 343 Back

298   Q 344 Back


 
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