Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 340-346)


8 MAY 2007

  Q340  Peter Viggers: I did say "disappointment". The Court is specifically tasked with determining whether "the Committee has collected the regional, sectoral and other information necessary for the purposes of formulating monetary policy". How do you carry out this duty?

  Dr Potter: Firstly, I would comment that the Bank has a set of agencies across the country in the different regions and countries of the United Kingdom that reports back, by having monthly interviews in their regions or countries, the results of the activities in their region or country to the Bank of England in Threadneedle Street. That agency is very substantial and important. To give you some idea, we compared the Bank of England with the Bank of Canada and the Reserve Bank of Australia. In the Bank of England, some 25% of our resources are supporting monetary policy are devoted to collecting regional economic intelligence. In the Bank of Canada, the equivalent figure is 7% and in the Reserve Bank of Australia, the equivalent figure is 12%. The Bank of England spends two to three times as much relatively as these other equivalent reserve banks in doing that. Members of the Monetary Policy Committee and members of the Court travel across the country; many of them give lectures and have meetings with business people in those different regions. We also, as members of the Court, attend pre-MPC meetings where we see the agencies delivering their reports. Usually one of the agencies will deliver the report to the MPC. In a whole variety of ways, we check that this process is carried out extensively. I believe it is.

  Ms Fawcett: I would add that this is a critical part of the questionnaire process that I was mentioning earlier. Each year we will ask every MPC member what their view is on the agencies, on the regional information, country information, including how well the agents are working and this will be discussed with MPC members.

  Q341  Peter Viggers: The MPC is of course not completely transparent; it is not intended to be. Mechanisms are built in terms of delay and in terms of anonymity to a certain extent. How do you monitor the transparency of the MPC and make sure that it is as transparent as it should be?

  Dr Potter: Every month we have a report on the previous weeks activities of the MPC. We get the minutes. We attend pre-MPC meetings and we have quarterly discussions from the Chief Economist of the Bank, Charlie Bean, on the MPC process and how it is going. Therefore, we are in a position to study how matters are articulated publicly and the balance of that and those members on the MPC who are members also of Court discuss that at Court. There are discussions about the transparency but in general the Bank tries to be as transparent as it possibly can. I think this has been discussed by the Governor and the issue arises as to whether you get into sign language which can be unfortunate. In general, the Bank tries to be transparent. I am satisfied that it is.

  Q342  Peter Viggers: Yes, it tries to be as transparent as it wishes to be. The Court has been praised by former external members of the Monetary Policy Committee for the work that it undertook to ensure that members of the Monetary Policy Committee had sufficient resources available to it. Would you say a word or two about that and about the manner in which that operated and the manner in which you ensure that sufficient resources are made available?

  Dr Potter: Ms Fawcett has said that every year we carry out a survey with an extensive questionnaire, which is filled in and on scores in the range of one to five last year that figure of satisfaction by MPC members was round about four out of five, so pretty satisfied overall. In addition to that of course they are questioned formally by the Chairman of the Non-executives, Sir John Parker. In addition to that, we have a variety of opportunities throughout the year to meet with MPC members. This can be informally over lunches or it can be formally in Court when about every three months MPC members will come along and be quizzed and there will be discussion as to how satisfied they are. Through these various procedures and processes that occur regularly annually throughout each year, we do get comprehensive feedback. I believe that overall at the present time our data says that things are pretty satisfactory. There are some evolutionary changes. If you go back five or seven years ago, there were many more substantial changes than there are currently because the system appears to be working pretty satisfactorily as far as they are concerned.

  Q343  Peter Viggers: One witness, Dr Wadhwani, taking to us in March of this year has said, and I quote: "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." Are those rumours that you have heard?

  Dr Potter: Absolutely not; I have no knowledge either of the rumour or the fact. There is no such intention of which I am aware.

  Q344  Peter Viggers: You are satisfied that MPC members have access to you and could communicate if they were concerned about resources?

  Dr Potter: Absolutely.

  Q345  Peter Viggers: Does the Court hold any other concerns as to resources allocated to monetary policy by the Bank, whether in terms of staffing or financial resources?

  Dr Potter: Let me comment and then ask Ms Fawcett to comment as well. Annually, we receive a report on that issue from the Chief Economist to the Court and we discuss it in Court extensively. We also discuss the budgets very comprehensively of the Bank of England every year, so you have the strategy and the three-year plan below that and then you have budgets as well. The Court is tasked with ensuring value for money and the efficient use of resources of the Bank. The issue arises as to how many economists do you need and how much resource do you need in order to produce policy? You can argue that one economist and a computer would do the job but do you need 500 economists, as you have in the Federal Reserve or in the ECB, or some 180, as you have in the Bank of England? There are about 106 economists in monetary analysis and they are of high calibre. What has been changing is that the number is being reduced somewhat but the experience and expertise, the level of those, is being increased, so there is that change going on. The level of funding assigned to monetary analysis was £64 million during the last financial year. On all the reports that we have had, both by external assessors like Kohn and Pagan, or by external people who attend the pre-MPC meetings and see the process, it is considered that the provision of analysis and data is of the highest calibre and quality.

  Q346  Peter Viggers: Then the Court straddles the two worlds of the official government structure, the Bank of England, and the financial world outside. From that privileged position, are you satisfied that the Bank of England is able to recruit people and box its weight because the distorting effect of some City salaries now is having a very significant effect?

  Dr Potter: I think that is an important and key question. The answer historically is "yes". To spread the question, it is an issue for the future and it is a matter that I have raised and indeed the Court is concerned about and we have discussed considerably. I do think that the fact that one has a very wide range of economists who will play many different roles in our society means that we tend to attract obviously the most eminent graduates coming in, the highest calibre graduates coming in We take them through their 20s and 30s but do we lose them in their 30s? The issue is our ability to retain those people and groom them for the highest levels in the Bank, and also the ability to attract people in their 30s when they are at the peak of their careers, if you like, as economists. I think the threat of City salaries is a major issue. The reputation of the Bank of England is very substantial. The nature of the work and the fact that you are influencing policy and you are concerned with public policy is a magnet, and all this helps currently to allow us to attract and retain staff, but it is an issue in the long run, which we need to be concerned about.

  Ms Fawcett: I would add further to what Dr Potter has said. Quarterly we do get a very extensive performance report across all the various strategic and business objectives and financial objectives of the Bank. What comes out of that as well are some detailed statistics on recruiting and retention by area. I would add that this is an issue not just for monetary policy or monetary analysis but also for financial stability. In Court we take a great deal of time to go through that information and discuss with the Bank what their procedures are. We have pressed very hard for a specific strategy on how to retain the very best people that they can. Originally I am from the City. I would be the first person to tell you that there is a rather large disparity between City salaries and those of the Bank. In the past this may not have been such an acute issue, for the reasons that Dr Potter mentioned, and I have seen it from my own institution. The Bank of England is an institution of the highest reputation and people are pleased to work there. 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.

  Chairman: Can I thank you for your evidence. We wish Sir John Parker a quick recovery. If there is anything we have missed this morning, we are happy to receive further written submissions from you.

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