Lessons Learned from the EU Referendum Contents

Annex 6: Letter from the Governor of the Bank of England Mark Carney OC to Chair of PACAC, dated 14 June 2016

I am responding to your letter to dispel immediately the numerous and substantial misconceptions it contained.

First, I have not “already made [my] views known about the question in the forthcoming referendum”. Nor do I intend to share my private opinion other than via the anonymity of ballot box when I join millions of others to cast my vote. All of the public comments that I and other Bank officials, have made regarding issues related to the Referendum have been limited to factors that affect the Bank’s statutory responsibilities and have been entirely consistent with our remits.

I have made this point explicitly on a number of occasions. For example, at the outset of a speech I gave last October, alongside a report we published on EU membership and the Bank of England, said “Our report is solely concerned with how EU membership affects the Bank’s ability to achieve our core objectives of maintaining monetary and financial stability. It is not a comprehensive assessment of the pros and cons of the United Kingdom ‘being in Europe243.

In my evidence to the House of Commons Treasury Committee session on the economic and financial costs and benefits of UK membership of the EU, I was clear that “economic questions are important questions in terms of the broader decision the people of the United Kingdom have to make, but they are not the totality of the considerations upon which people will reflect and make their decision on how to vote. We will not be making and nothing we say should be interpreted as making any recommendation with respect to that decision.”244

Second, your letter demonstrates a fundamental misunderstanding of central bank independence as enshrined in statute. The Bank has been given, by Parliament, operational independence to pursue monetary and financial stability, within clearly defined frameworks. The Bank must assess the implications of the UK’s EU membership for our ability to achieve our core objectives. The Bank has a duty to report our evidence-based judgments to Parliament and the public. Indeed that responsibility to provide a high level of transparency is enshrined in our remits.

For example, the Remit for the Monetary Policy Committee sets out that “the Committee should promote understanding of the trade-offs inherent in setting monetary policy”. Moreover, it requires when inflation deviates from the 2 % inflation target by more than 1 percentage point as was the case in May, that the Governor must write an open letter to the Chancellor that sets out, amongst other things, a description of “the trade-off that has been made with regard to inflation and output variability in determining the scale and duration of any expected deviation of inflation from the target rate” and “how this approach meets the Government’s monetary policy objectives”. Given that in the view of all nine independent members of the MPC the “most significant risks to the MPC’s forecast concern the referendum” and the implications of a vote to leave the EU “could lead to a materially lower path for growth and a notably higher path for inflation” and therefore the Committee “would face a trade-off between stabilising inflation on the one hand and output and employment on the other” it would have been clearly contrary to our remit not to comment on this in our publications.245

Similarly, the FPC was quite clearly meeting its statutory remit when it reported that in agreeing its view on the outlook for financial stability and, on the basis of that, its intended policy actions, it “assessed the risks around the referendum to be the most significant near-term domestic risks to financial stability”.246

As testified to the House of Lords Economic Affairs Committee in April 2016 “This is the fundamental standard of an open and transparent central bank. Assessing and reporting major risks does not mean becoming involved in politics; rather, it would

be political to suppress important judgments that relate directly to the Bank’s remits and which influence our policy actions.”247

As also explained in my testimony to the House of Commons’ Treasury Committee in May if “we are changing policy, as the Bank of England have changed our liquidity policy, we have changed our supervisory policy, and we might have to change our monetary policy in pursuit of our have an obligation to disclose that”.248

The Chair of the Treasury Committee, through which the Bank of England is accountable to Parliament, has acknowledged the appropriateness of the MPC setting out the impact of this issue on our statutory responsibilities when he said, again recently and publicly, “a vow of from the Bank of England on this subject would have resulted in a bumpy hearing or two for you and your colleagues in front of this Committee in the face of a decision or an event of this type.” 249

Third, your letter refers to section 125 of the Political Parties, Elections and Referendums Act 2000 (PPERA). The Bank is familiar with PPERA and has confirmed its understanding of those provisions with the Electoral Commission. The Bank is not “a person or body whose expenses are defrayed wholly or mainly out of public funds” and, as such, is not subject to the restrictions in section 125.250

Nonetheless, the Bank has voluntarily determined to observe purdah in the spirit of the guidelines issued by the Cabinet Office on 26 May 2016. Of course, the Bank must continue to pursue its statutory objectives throughout the purdah period and will therefore continue to publish ‘business as communications pursuant to its statutory remit.

The Bank’s full arrangements for purdah were shared with the Chairman of the Treasury Select Committee on 25 May as noted to Andrew Tyrie MP, these arrangements were discussed by the Bank’s Court of Directors and circulated to all Bank staff, including MPC, FPC and PRA members. They are in addition to our normal codes of conduct for our policy committees that are available on the Bank’s website.251

As highlighted in my most recent evidence to the Treasury Committee, the most obvious “business as usual” publication that the Bank will make this month is the minutes of the latest MPC meeting which will be published on 16 June. These minutes will provide a full record of the MPC’s deliberations and the factors the Committee considered relevant to its monetary policy decisions252. As noted in my evidence, these may therefore make reference to Referendum effects if the independent committee members judge them to be relevant to the pursuit of the MPC’s remit. Again this is entirely appropriate, especially if, in the view of the independent MPC, the data on which our monetary policy decision is based are being affected by the referendum.

Mr Jenkin, in conclusion, transparency is a hallmark of parliamentary accountability. My comments as Governor, and those of my independent colleagues, have been in the discharge of the Bank’s responsibilities. Those responsibilities stem from the sovereign will of Parliament which we must respect. The vast majority of these public statements have been made in the context of official publications relating to the Bank’s policies or minutes of its Committee meetings, or during parliamentary testimony. The Bank’s policies and the minutes of the proceedings of its committees are published to hold the independent members of those committees to account and to enhance the effectiveness of their policies - there is an extensive literature on how to structure central bank independence and accountability most effectively, which is summarised and drawn on in the recent Warsh Review253 would note that have testified more than anyone else in front of Parliamentary Committees having given evidence on 22 occasions since became Governor in July 2013.

Given his consideration of this issue, and our accountability to Parliament via his Committee, I am copying our exchange to the Chair of the Treasury Committee. You should feel free to place these letters in the public domain.

In the future, I would be grateful if you would do me and my fellow independent committee members the courtesy of consulting the public record before writing letters such as that which I received on Monday.

Mark Carney

Comment from Michael Carpenter on s.125 and the Bank of England, 15 June 2016

The Bank is a Government-owned corporation, but funds its operations from the sale of gilts and the receipt of regulatory fees.

To the man in the street, this seems to be very like the BBC (which is specifically excluded in s.125). The TV licence fee was reclassified in 2006 by the Office of National Statistics as a tax, and so for statistical purposes the BBC is classified as a central government body. The income of the BBC is largely derived from the TV licence fee which is paid by viewers (whether they intend to watch the BBC or not) and these monies seem to have been regarded as ‘public funds’ for the purposes of s.125 (otherwise there would have been no need for the exclusion).

The reference in s.125 is to ‘public funds’, rather than funds voted by Parliament, so it is a nice question whether the funds held by a Government owned body are also ‘public funds’. Technically, they are not funds paid by the taxpayer (or at least not exclusively) but they are, in a broader sense, funds which are publicly owned. It is very hard to predict, but if the matter were ever litigated a court might well take a more purposive approach in deciding that s.125 is concerned with the use of publicly-owned resources in a referendum campaign, and might not be too attracted by technical arguments as to the origin of those resources.

The meaning of s.125 is a question of law for the courts, not for the Electoral Commission (to be clear, no power is conferred by PPERA on the EC to make such a determination). I think one may infer from the Governor’s letter that the Bank was sufficiently uncertain of its position as to feel the need to obtain some comfort from the EC. They no doubt did so, because the EC would be the most likely person to seek to enforce s.125.

Michael Carpenter, Speaker’s Counsel



243 See Carney, M (2015), Cairncross Lecture, October 2015, available here http://vvww.bankotenQlandxo.uk/publications/Documents/speeches/2015/speech852.pdf and Bank of England (2015), EU Membership and the Bank of England, October 2015, available here http://www.bankofenqland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf.

244 Oral evidence: The economic and financial costs and benefits of UK membership of the EU, Tuesday 8 March 2016, available here: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasurv-committee/the-economic-and-financial- costs-and-benefits-of-uks-eu-membership/oral/30246.html

245 Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 11 May 2016 available here: http://www.bankofenaland.co.uk/publications/minutes/Documents/mpc/pdf/2016/mav.pdf

246 Record of the FPC’s March 2016 meeting is available here: http://www.bankofengland.co.uk/publicatlons/Documents/records/fpc/pdf/2016/record1604.pdf.

247 Available here: http://www.bankofenqland.co.uk/publications/Documents/ot her/treasurvcommittee/other/eac190416.pdf

248 Oral evidence on the Bank of England inflation report, Tuesday 24 May 2016, available here: http://www.parliament.ul</business/committees/committe enqland-inflation-report-hearinqs-2015–16/

249 See footnote 6 for reference.

250 Further details of our funding arrangements can be found in our Annual Report, available here:http://www.bankofenqland.co.uk/publications/Documents/annualreport/2015/boereport.pdf.

251 MPC Code of Conduct is available here: http://www.bankofenaland.co.uk/monetarvpolicv/Documents/mpccoc.pdf FPC Code of Conduct is available here: http://www.bankofenqland.co.uk/financialstabilitv/Documents/fpccoc.pdf

252 Transcripts of these meetings, alongside all relevant documents and analysis, will be published in eight years.

253 See Warsh, K (2014), Transparency and the Bank of England’s Monetary Policy Committee, available here: http://www.bankofenoland.co.uk/publications/Documents/news/2014/warsh.pdf




11 April 2017