Select Committee on Treasury Twelfth Report


6  The transparency of the Monetary Policy Committee

Inflation expectations and educating the public

97. As we saw earlier in our discussion of the economic context of the MPC's work, it is important for inflation expectations to remain anchored, especially should economic circumstances change. In his written evidence to us, Mr Saunders described the inflation target as having "high financial market credibility".[299] However, he went on to suggest that "the credibility of the inflation target framework in the real economy is far more doubtful. Household inflation expectations do not appear to be well anchored on the 2.0% inflation target."[300] Ms Barker told us that "It is perhaps a little bit disappointing that we have not seen a greater growth of knowledge from the public" about who sets interest rates and how the monetary policy process works.[301] She praised the work the Bank of England has done with younger people, as well as the Bank's agents, but felt there was more that could be done.[302] Dr Sentance raised a more short-term concern that:

In my view the most important thing for anchoring expectations is people's experience of inflation. I think the fact that since 1992 we have had a long period of low inflation has been a great benefit in the current framework. I think the longer that inflation remains above the target the more there is the risk that that does begin to affect people's expectations, so I think, as the Governor's letter indicated, the expectation that inflation returns to target quite quickly is quite important in this context.[303]

Mr Lambert also thought the MPC could do more to educate the public. While he acknowledged that the MPC is good at communicating with financial markets, he explained that:

It might well be in its interests to think about - and I know it is thinking about - how to inform and educate a broader public about its mission because […] when times get tougher its role will be more controversial and it would be a good thing, ahead of that, if more people knew why what it did was important and why its decisions, properly made, are to the benefit of the whole of society.[304]

98. Others were less worried about the risk of the anchor slipping. Lord George told us that while the inflation level may not have been precisely anchored to a certain number, it is anchored at a low level, "rather than in double digits".[305] He believed that:

public explanation is absolutely critical and it is an ongoing process. I do not think we will ever get to a situation where everyone in the country knows about the MPC and the details of the target and all that. It is the broader understanding that we have to keep reinforcing.[306]

Professor Besley told us it was an ongoing challenge to communicate with the general public, but that the anchor was currently not at risk. He told us that he did not think "personally … there is more that we need to do beyond what we would be doing anyway, which is to convey our views clearly".[307] Professor Blanchflower agreed, telling us "Going forward we obviously need to communicate what our strategy is and that we will do everything we can to keep the inflation rate down".[308]

99. The Governor told us that he thought "we [the MPC] have done a good job in explaining to people that the main aim of the MPC is to maintain a balance between demand and supply in the economy".[309] When asked whether there was more the MPC could do to cement lower inflation expectations the Governor replied "We have spent a great deal of time talking to people around the country to make clear that we are completely determined to bring inflation back to target".[310] We acknowledge the efforts the Monetary Policy Committee has made in educating the public, especially via its programmes for younger people, about its role, and the need for low inflation. However, certain of the Bank's own measures of the public's understanding remain low. We recommend that the Monetary Policy Committee and the Bank of England consider what the public need to know about the monetary policy framework, and then, with assistance from the Treasury if needed, consider a public education campaign to put across those points. It is important that if there are more uncertain times ahead, the public must understand and support the reasons behind movements in interest rates.

Writing letters

100. The remit letter of the Chancellor of the Exchequer to the Governor of the Bank of England states that, should inflation move more than 1 percentage point either side of the inflation target, the Governor should write an open letter to the Chancellor of the Exchequer, explaining why inflation has moved so far from the target, the policy action being undertaken to bring inflation back to target, the period in which it is expected inflation will return to target and finally how this approach "meets the Government's Monetary Policy objectives".[311] We were repeatedly told, both in written evidence, and oral evidence, that this letter writing should not be considered a sanction, but a communication tool.[312]

101. Lord George told us he wished he had written a letter so as to have relieved the pressure on his successor.[313] Professor Goodhart went further, telling us that it was his belief that "that every central bank governor and most members of the MPC are looking forward to the first occasion of letter-writing".[314] While deviations from the target were not welcome, he felt people were keen in "getting this part of the institutional instrumentation in operation and showing how it ought to work".[315] Professor Goodhart explained that that external shocks were, at the time of the creation of the monetary policy framework, expected to push inflation outside the boundaries much more often than had occurred over the last decade, and therefore an explanatory mechanism was required.[316] Professor Goodhart also pointed out that the Chancellor of the Exchequer, in his reply to the Governor's letter, could disagree with the MPC's suggested approach, and ask for a different policy to be enacted.[317]

102. When we heard evidence from current members of the MPC, inflation had breached the boundary in March 2007, and a letter had been written. We asked the external members whether they had been fully involved in the letter writing process, and they agreed that they had, given the limited time frame in which there was to act.[318] Ms Barker explained again that the letter writing process allows the MPC to explain the current position in regards to inflation, and what the MPC's future policy will be, while also affording the Treasury a chance to comment on that policy.[319] She explained that the letter's function "is to ensure that there is some sort of public accountability to the population that when things have moved away from target we discuss them openly".[320] She did not think it was an attempt to restore credibility.[321] She also stated that it was a possibility that the Chancellor of the Exchequer would disagree with the MPC's suggested policy, and write back saying so.[322]

103. The Governor of the Bank of England also saw the letter writing process as a chance to explain "why the [Monetary Policy Committee] thought that inflation had risen to that level … to point out again what our framework for policy is and to say what we would do to deal with that situation".[323] The Governor pointed out that the writing of a letter should not be associated necessarily with a "a failure of policy", but that it should be considered as part of "the accountability of the framework".[324] The Governor also acknowledged that the Chancellor of the Exchequer may disagree with the policy of the MPC to bring inflation back to target, but that the letter made such a disagreement public.[325] The Governor felt that in any disagreement, the Chancellor of the Exchequer would have to provide the MPC with a clear indication of what alternative policy he or she wished them to undertake, in a public forum.[326] The then Chancellor of the Exchequer said that the "experience of the exchange of letters was a good one".[327] He also said that "It has obviously got to be at the discretion of any Chancellor to take a different view from the Governor about the overall effect on the economy".[328]

104. We are firmly of the view that the letter writing process should be regarded as part of the accountability mechanism of the framework, rather than a sanction. While the experience has been limited, at some point a Chancellor of the Exchequer and the Monetary Policy Committee may disagree about the steps to be taken to bring inflation back to target. In such a scenario, we would expect the reply from the Chancellor of the Exchequer to set out the Treasury's view of the reasons for inflation breaching the target, as well as their suggested timeframe and policy for bringing inflation back to target. This would allow both the House of Commons and the public in general to see clearly the areas of disagreement.

Future path of interest rates

105. One criticism of the current level of transparency provided by the Bank of England related to the information provided by the MPC about their view on the future path of interest rates. Projections of gross domestic product provided in the Inflation Report are conditioned on either the current level of interest rates not changing, or future rates as implicitly forecast by financial markets. Professor Wren-Lewis suggested the idea of the MPC providing a forecast of future interest rates, telling us that "the procedure the Bank uses [of market interest rates] is entirely inconsistent, in the sense that it has in it a set of projections for interest rates which is not necessarily sympathetic with the rest of its forecast, so there is a problem".[329] Mr Barrell supported the idea, saying "it might be more effective to announce your plan in advance so people know you are going to react in the right way".[330]

106. Professor Congdon was not in favour of introducing such 'official' interest rate forecasts.[331] Professor Muscatelli was also not in favour, telling us that there could be a scenario where "interest rates have to be adjusted quite dramatically, where the Bank would then decide to move away from its original forecast and that could cause potentially quite a bit of disturbance in terms of expectations adjusting in financial markets".[332] Professor Chadha told us that the economies in which such forecasts had been tried were "small, open economies," and publication of these forecasts could "stifle the market revelation of private information about interest rate paths" and also it would be difficult to get nine members of the MPC to agree to one forecast.[333] Mr Paul Tucker, Executive Director of the Bank of England with responsibility for markets, also told us that under a system of "one person - one vote" it would be difficult to agree a common forecast, and secondly, and more importantly in his view, such a forecast would require such a lot of explanation that it would decrease rather than increase transparency and understanding.[334]

107. In a lecture to the Society of Business Economists, the Governor cited four reasons why interest rate forecasts may not be useful. First, such forecasts would not explain what the MPC would do should certain risks crystallise; Second, while in the very short-term markets found it difficult to predict monetary policy decisions, in the longer-term, interest rates had been more predictable. Third, he questioned whether voting could be used to create a forecast for future interest rates. Finally, he wondered how MPC would prevent the public at large assuming that the central projection of such a forecast was going to be the actual outturn.[335] However, in the same speech the Governor suggested that there appeared to be an appetite for the MPC to "talk more about what lies behind the fan chart and how we might change our thinking in response to developments in the data".[336]

108. The then Chancellor of the Exchequer told us that there was no proscription on the Bank preventing it publishing more information, but that he thought that the Bank's current work in this areas was "both adequate and probably in line with what people would expect of it, so I would not be proposing a change".[337] Whether or not the Monetary Policy Committee provides a forecast of future interest rates, there appears to us to be a need for more information to be provided by the Monetary Policy Committee to aid both financial markets and the general public. We therefore welcome the Governor's thoughts on providing more information around possible policy reactions should certain risks crystallise. However, we also recommend that the Bank undertake regular work to assess the current academic thinking on the feasibility and desirability of publishing an interest rate forecast, and keep this matter under review.

Transparency after the vote

109. The current timetable for the release of information following a decision of the MPC is as follows: The decision is communicated to the markets at midday on the Thursday meeting. Occasionally, a short statement is released with the meeting decision notice. The minutes are then published on the Wednesday of the second week after the MPC meeting. The actual details of the vote, such as who voted for what policy decision, are only available with the minutes.

110. When asked whether the current arrangements for immediate post-vote transparency were adequate, Professor Chadha replied "We could give serious thought to publication of the vote split at the time of the notification of the interest rate decision, along with a mandatory short statement of the sort that is issued by the central banks".[338] He pointed out that in the two week period in January 2007, between the vote decision being communicated to the market, and the publication of the minutes, uncertainty around how close the vote of the MPC was "led market interest rates to be priced higher than they would otherwise and appreciation in the exchange rate that came off when the information that there had been a 5:4 split was published two weeks later".[339] Mr Sanders expressed his strong support for the idea of such a statement, saying that the movements caused by the uncertainty in the intervening period did not sit well with the Bank's role in promoting financial stability.[340] Ms Bell told us she could see no reason why the immediate vote could not be published as markets could benefit from knowing whether it would be a close vote or not, but acknowledged it would be harder to agree an accompanying explanation.[341]

111. Lord George opposed the idea of publishing the votes immediately without the additional information of the minutes, telling us "That would be great for the newspapers and sensationalism: a hawk voted this way and somebody else voted another way. I do not believe that that would convey very much."[342] When we asked the Governor of the Bank of England whether the split of votes could be published but without naming the individuals, to circumvent the criticism of Lord George, he was not supportive. He said that such a move would create speculation as to the identities of the different votes, and it would constrain members of the MPC from speaking until the minutes had been published, because if one person revealed their position, then the others would be forced to follow suit.[343] He opposed the idea attaching a statement to every vote decision, preferring the fuller explanation of the minutes, telling us "It is much better to be able to explain at full length what were the arguments for and what were the arguments against the decision that was finally reached".[344] Mr Bean did not see the merit of a bias statement, viewing the minutes as the proper time for a fuller explanation of the merits of the various arguments around the different issues affecting monetary policy at the time.[345]

112. We have heard different views on the need for immediate transparency on the voting pattern of the MPC. We have concluded that the balance of arguments supports the need for immediate transparency of MPC voting, which would allow financial markets to assess the strength of the support within the MPC for any given decision. We recommend accordingly that the Bank of England publish, alongside the interest rate decision, the outcome of the vote, indicating which individual MPC members voted which way.

Dealings with professional economists

113. In their evidence to us, BNP Paribas suggested further improvements to enhance the MPC's transparency to professional economists.[346] One request Professor Chadha made was for the Bank's model to be available, with full database and simulation suite support, above and beyond the book already provided.[347] As well as this, Professor Chadha requested a direct forum for professional economists to engage with the MPC.[348] Mr Saunders said that the model would be a "nice thing to have".[349] Mr Bean, Chief Economist to the Bank of England, in his reappointment hearing before us on 28 June 2007, said that:

The question of whether we could do some general regular thing for City economists is I think one that is worth considering. An issue that we would have to address would be to make sure there is a level playing field. You cannot just have a subset; you would have to make it in principle accessible to all. It is something that we have actually been thinking about, whether we should do something along those lines, so watch this space.[350]

We were pleased to hear that the Bank is considering a structured set of discussions between professional economists and staff members of the Bank, and members of the Monetary Policy Committee. We recommend that the Bank provide to this Committee within six months an outline of a plan for such meetings, that allows for a diverse membership of participants, and allows for an open and transparent record to be kept.

Transparency of the views of individual MPC members

INTRODUCTION

114. Because the MPC operates on a 'one member, one vote' system, knowledge of the views of the individual MPC members positions is important for financial markets to understand the current thinking of the MPC on the economic environment and monetary policy going forward. Below we discuss certain methods via which that transparency could be increased.

MINUTES

115. The current practice for the MPC is not to individually name different viewpoints within the minutes. Professor Muscatelli regarded parts of the minutes as "rather cryptic" and stated that "it would be much more helpful if dissenting members of the committee were able to set out their positions more clearly in the minutes".[351] Professor Congdon agreed, telling us "There should be scope for members of the MPC to say a few things on their own, signed by themselves, and I think that actually the minutes should be a little bit more forthcoming".[352] Ms Bell also saw no reason why individual views could not be identified in the minutes, but she acknowledged the danger of members arriving with prepared texts.[353] Mr Lambert provided us with the following example as an illustration of where additional information on members of the MPC views may be useful: "I have been at meetings where it has been clear that some people are very close to changing their minds but just have not changed their minds. That is not caught in a yes or no vote".[354]

116. Some disagreed with the idea of further identification of individuals within the minutes, fearing it might alter the quality of debate within MPC meetings. Mr Saunders worried that MPC members would come with prepared passages for the meetings, rather engaging in a debate about the topics.[355] Lord George was also "very sceptical" about assigning statements in the minutes to individual members of the MPC. He felt that because of the inherent uncertainty in the decision making, the lack of firm positions at the start of the meetings would mean "one would get the impression that they did not know what they were doing".[356] He pointed out that speeches and Treasury Committee hearings were the places for individual members of the MPC to state their positions. He thought to do so in the minutes would change the character of the MPC meetings, and would not be helpful.[357] Professor Goodhart declared that "I think that individualism in this country is splendid, and it has already gone far further than any other country. To ask for much more at this stage is probably going too far."[358] We are concerned about the effects on the debate within the Monetary Policy Committee of having a paragraph assigned to each member. However, we believe greater thought should be given by the Monetary Policy Committee to ensuring that the balance of views of members is more identifiable with particular individuals, rather than just identifying how individual members voted. We therefore recommend that, whenever the minutes at the moment refer to "one member", that member be named within the text.

STATEMENTS TO THE TREASURY COMMITTEE

117. One method we suggested of increasing the accountability of the position of individual members of the MPC was via an 'annual report' statement to be submitted to us by individual MPC members. Professor Congdon went further suggesting "At the Treasury Panel, everybody put in a submission every meeting, signed by themselves".[359] Mr Sanders agreed with the idea of an annual report, remarking that:

Most of us are subject to annual reviews and therefore since these people occupy such an important role in public life, my personal view is that it would be useful to ask each MPC member to provide an overview of what has been achieved over the past 12 months and their views on the UK economic management over the next 12 months or two years, according to their tenure of office.[360]

Dr Sentance also had no objection to providing such a report, but noted that MPC members appeared before this Committee every six months.[361] Sir John Gieve also had no reservations about providing an annual report.[362]

118. Professor Besley, while not rejecting the idea, did however have a reservation:

the timing of the report to you would be rather arbitrary in terms of what is going on in policy and therefore may focus too much attention on a particular date in the policy process. One of the things we have achieved by having an even pattern of communication with Inflation Reports at regular intervals and minutes at regular intervals is that we have a rather even pattern of communication. As long as some way could be established to make sure that undue significance was not placed on a particular date which would be somewhat arbitrary in the policy cycle, I would not oppose.[363]

Others were less keen on the idea, fearing that the reports would serve little further purpose. The Governor was also more reticent to accept the reports, not wanting "to impose on the world … more pieces of paper".[364] He felt all that could be written down could be discussed at the Treasury Committee's hearings.[365] He went on to say that he would accept such a report if a good reason could be given for it.[366] Mr Bean was willing to accept the idea of a report providing additional background material on key topics before attending Treasury Committee hearings.[367]

119. We have listened with care to the arguments against each member of the Monetary Policy Committee providing an annual report to this Committee. We have particularly reflected upon the concern that such reports might focus attention on a particular date. However, we are persuaded that regular reports by each member of the Monetary Policy Committee to this Committee would further enhance their individual accountability and enhance the value of our regular hearings with members of the Monetary Policy Committee about inflation reports. To overcome concerns about timing, we will request each member to prepare his or her report for a 12-month period ending with a different month. We wish to receive a report on that basis from each member of the Monetary Policy Committee which:

  • lists the work they have undertaken to promote transparency in and wider understanding of monetary policy in the preceding year;
  • assesses their own voting record in the Monetary Policy Committee over that period; and
  • sets out their thoughts on monetary prospects for the coming year.

ATTENDANCE AT INFLATION REPORT PRESS CONFERENCES

120. After the publication of the Inflation Report, the Governor of the Bank of England holds a press conference, which is available live on the Bank of England's website. At these meetings, generally the Governor, Mr Tucker as Executive Director for markets and Mr Bean, Chief Economist of the Bank of England, attend. The Governor answers the majority of questions, asking for Mr Tucker or Mr Bean's comments if the questions require additional detail relevant to their areas. Dr Wadhwani suggested in his written evidence to us that 'external' members of the MPC, by rotation, should be present at these press conference. When we put this idea to the Governor, he strongly disagreed, telling us:

We have two distinct publications that come out around that time: one is the Inflation Report and one is the minutes. They have quite distinctive purposes. The Inflation Report is to explain essentially the majority decision that was taken and to explain the collective view of the MPC about the forecast. When I speak at the Inflation Report press conference I am speaking on behalf of the Committee. Once we have reached our decision on that Thursday of that month we then spend quite a considerable amount of time discussing the drafting of the Inflation Report that we put out. We go through it word by word for good chunks of the text. If the Committee agree on that, my task is to explain that to the audience. That publication and my role in that is to speak on behalf of the Committee as a whole. Individual views where all nine members—not just the externals but internals as well—have different views, as you can see in this split of votes in the January decision this year, are set out in the minutes. The minutes are an opportunity for arguments to be set out and then people can make speeches and so on. We encourage people to make speeches to set out their views so that people outside understand why they have voted the way they have.[368]

We accept the argument presented by the Governor as to why other members of the MPC should not be present at the Inflation Report press conference. Members of the MPC who do not agree with the line taken at an Inflation Report press conference already have options at their disposal to explain their views in public. In addition, we consider that, where members of the Monetary Policy Committee do not agree with the line taken at an Inflation Report press conference, they should communicate this disagreement to us in advance of our ensuing Inflation Report hearing.

Our Inflation Report hearings

121. One of the means by which the accountability and transparency of the MPC is secured is through the regular hearings held by the Treasury Committee into the Inflation Reports of the Bank of England. Mr Saunders told us that "The testimony to yourselves is a very important part of what they [the Monetary Policy Committee members] do,"[369] and Lord George described our hearings as "terribly important" in that it provides an "opportunity for us [the MPC] to explain to the Treasury Committee what we were doing, and for individual MPC members to explain their thinking".[370]

122. While there was support for the meetings, some thought more could be done. Ms Bell told us that "I think that it is … the job of [the Treasury] Committee to be a bit stronger in eliciting individual views".[371] Ms Lomax was more forthright, telling us that

I do think that you let members of the [Monetary Policy] Committee off quite lightly. I come along to these sessions with the Governor and most of the questioning goes to him.[372]

123. Sir John Gieve noted that "The initial hearing that you held with me was a completely different degree of scrutiny from this Committee than I get coming with the Governor from time to time".[373] The Governor was more flattering, telling us that during our meetings, "I think that what has happened in the last ten years is that we have a genuine and evolving dialogue on the state of the economy and on whether monetary policy is being conducted in an appropriate way".[374] He pointed out that, unlike in the past, in his opinion, "It is not a vehicle for you and others to score political points and I think that is a big step forward as an observer of this for over 15 years now".[375] However, he still thought that we "could perhaps do a little more by way of asking us individually to explain why we had voted the way we had in a sequence of recent months, but by and large I think the debate that we have is a genuine discussion about the state of the UK economy and the outlook for inflation".[376] On a different point, the Governor of the Bank of England also requested that we hold hearings into the August Inflation Report, so that the natural pattern of one each quarter was maintained.[377] We welcome the support we have received for our hearings into Inflation Reports. However, we will seek to respond to suggestions for improvement, including through greater questioning of all members of the Monetary Policy Committee present and hearings on August Inflation Reports.


299   Ev 47 Back

300   Ibid. Back

301   Q 183 Back

302   Ibid. Back

303   Ibid. Back

304   Q 365 Back

305   Q 105 Back

306   Q 106 Back

307   Q 182 Back

308   Ibid. Back

309   Q 244 Back

310   Q 243 Back

311   Remit for Monetary Policy Committee, Letter from the Chancellor of the Exchequer to the Governor of the Bank of England, 21 March 2007 Back

312   Ev 76, 102; Qq 148, 151 Back

313   Q 129 Back

314   Q 149 Back

315   Ibid. Back

316   Qq 148-150 Back

317   Q 148 Back

318   Qq 184-185 Back

319   Q 214 Back

320   Ibid. Back

321   Q 215 Back

322   Q 218 Back

323   Q 242 Back

324   Q 261 Back

325   Q 264 Back

326   Q 266 Back

327   Q 435 Back

328   Q 436 Back

329   Q 54 Back

330   Ibid. Back

331   Ibid Back

332   Ibid. Back

333   Q 87 Back

334   Q 285 Back

335   'The MPC ten years on', Speech by the Governor of the Bank of England to the Society of Business Economists, 2 May 2007, pp 21-22 Back

336   Ibid., pp 2-4 Back

337   Q 447 Back

338   Q 90 Back

339   Q 91 Back

340   Q 92 Back

341   Q 167 Back

342   Q 137 Back

343   Q 286 Back

344   Ibid. Back

345   Q 287 Back

346   Ev 101 Back

347   Q 93 Back

348   Ibid. Back

349   Q 95 Back

350   HC (2006-07) 569-II, Q 4 Back

351   Q 55 Back

352   Q 55 Back

353   Q 167 Back

354   Q 397 Back

355   Q 88 Back

356   Q 134 Back

357   Q 136 Back

358   Q 167 Back

359   Q 56 Back

360   Q 89 Back

361   Q 240 Back

362   Q 284 Back

363   Q 241 Back

364   Q 280 Back

365   Ibid. Back

366   Q 281 Back

367   Q 283 Back

368   Q 288 Back

369   Q 82 Back

370   Q 104 Back

371   Q 167 Back

372   Q 282 Back

373   Q 289 Back

374   Q 279 Back

375   Ibid. Back

376   Ibid. Back

377   Q 290 Back


 
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