Conclusions and recommendations
Reform of the monetary framework
1. The
monetary policy framework of the last decade has been broadly
successful. At least some of that success can be attributed to
the Bank of England Act 1998. Continuity is an important part
of this framework, allowing market participants to have faith
in the stability of the system. In view of the broad level of
success of the framework and of the legislation, we do not see
any reason why legislation to amend the Bank of England Act 1998
ought to be accorded high priority within the Government's legislative
programme. Thus, while some of our recommendations might require
legislative change, we accept that the opportunity for such change
may not occur in the near future. (Paragraph 7)
The economic context
2. While
it is difficult to quantify the contribution made by the Monetary
Policy Committee to maintaining a low inflation rate over the
last decade as distinct from the effects of wider changes in the
global economy, the Monetary Policy Committee deserves a significant
amount of credit for ensuring that inflation over the last decade
has been both lower, and less volatile, than in preceding decades.
(Paragraph 14)
3. Several issues,
such as the recent rise in asset prices, the potential end of
the tailwinds of an increasing effective labour supply and globalisation
which have tended to reduce inflationary pressures in recent years,
and the risk of a disorderly unwinding of global imbalances have
been drawn to our attention as factors suggesting the possibility
that the economic climate over the next ten years may not be as
benign as that seen over the last decade. While we are sure that
the Monetary Policy Committee are aware of this risk, it is important
that the public are also prepared for the possibility of less
benign conditions ahead. Later in this Report we examine actions
that may be necessary to educate the public about monetary policy
in more uncertain times. (Paragraph 18)
4. The recent period
of low interest rates has seen a rise in asset prices. One possible
response by the Monetary Policy Committee would be to target such
rising asset prices by 'leaning against the wind'—raising
interest rates to deflate the bubble in those prices. However,
such a move would presuppose the successful identification of
such a bubble. On the evidence we have received, this is not possible
with certainty. Furthermore, the only instrument available to
the MPC is moving the interest rate, and increasing interest rates
to counter a rise in certain asset prices could hamper economic
growth across the economy, not just in the markets with rising
prices. For such a policy to be worthwhile, therefore, the risk
to the economy of a rapid fall in asset prices would have to exceed
the actual cost of raising interest rates to counter the rising
asset prices. (Paragraph 22)
5. The weight of evidence
we have received suggests that the rise in household debt is not
on such a large scale as to exert significant influence on monetary
policy. However, the risk remains that future interest rate rises
will see larger numbers of households in financial difficulties
than anticipated. (Paragraph 31)
6. We have received
differing evidence about the importance that should be attached
to the rise in the money supply. While we acknowledge that it
is difficult to assess what information such strong growth in
the money supply might provide for future movements in the inflation
rate, there is a possibility that, in the medium term, the current
rise in the money supply might presage a higher path for inflation.
(Paragraph 33)
7. The anchoring of
inflation expectations has had an important role in ensuring that
inflation has varied by less than might have been expected given
the external shocks faced by the economy in recent times. However,
we remain concerned that, while inflation expectations appear
anchored in financial markets, the general public appear to have
less understanding of the monetary policy framework. (Paragraph
35)
The monetary policy framework
8. With
only a single policy instrument of interest rates available, we
agree that the Bank should have as its primary objective price
stability. However, subject to that, we will continue to monitor
the Monetary Policy Committee's compliance with the secondary
objective of meeting the Government's intention of high and stable
levels of growth and employment. (Paragraph 39)
9. It is appropriate
for the inflation target to be set by the Chancellor of the Exchequer.
We consider that it would be valuable to maximise certainty about
the target going forward. To that end, we recommend that the Government
give consideration as to how this might be achieved. (Paragraph
42)
10. We strongly support
the symmetry of the inflation target. We will remain vigilant
for any signs that there appears to be either anti- or pro-inflationary
bias by the Monetary Policy Committee, and should such signs appear,
we will ask for an explanation during our regular hearings on
Inflation Reports. (Paragraph 44)
11. We do not believe
that the move from the Retail Prices Index (excluding mortgage
interest payments) to the Consumer Price Index has adversely affected
the work of the Bank of England in anchoring inflation expectations.
While the Retail Prices Index may be the dominant index for wage
negotiation, and thus of interest to the Bank, wages are, in the
main, set by market forces. (Paragraph 45)
12. We do not, at
the present time, recommend changing the Consumer Prices Index
to reflect housing costs, before a pan-European consensus has
been achieved. However, we recommend that the Government and the
Office for National Statistics (with assistance from the Bank
of England if required) work with their European partners in bringing
about such consensus as quickly as possible. (Paragraph 49)
13. We see no merit
in the case for the Bank of England being given control of any
elements of fiscal policy, which should properly remain the province
of elected politicians accountable to the House of Commons. (Paragraph
56)
The Monetary Policy Committee as a body
14. 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. (Paragraph 58)
15. 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. (Paragraph 64)
16. 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. (Paragraph 68)
17. 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. (Paragraph
70)
18. 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.
(Paragraph 79)
19. 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. (Paragraph 82)
20. We believe that
the positions of the Governor and the two Deputy Governors should
be recruited by open advertisement as well as confidential search.
(Paragraph 84)
21. 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. (Paragraph 86)
22. 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. (Paragraph 91)
23. 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. (Paragraph
93)
24. 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. (Paragraph 96)
The transparency of the Monetary Policy Committee
25. 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. (Paragraph 99)
26. 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. (Paragraph
104)
27. 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. (Paragraph
108)
28. 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. (Paragraph 112)
29. 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. (Paragraph 113)
30. 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. (Paragraph 116)
31. 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. (Paragraph 119)
32. 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. (Paragraph 120)
33. 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.
(Paragraph 123)
| 
