Select Committee on Monetary Policy Committee of the Bank of England First Report


13 FEBRUARY 2001

By the Select Committee appointed to consider the Monetary Policy Committee of the Bank of England



1.  Since the Government gave the Bank of England operational responsibility for setting interest rates in 1997, the work of the Bank's Monetary Policy Committee (MPC) has become an established feature of economic policy and of political debate. Public interest in, and anticipation of, the monthly meetings of the MPC and the announcements of its decisions on interest rates continue to be high, and there is almost as much interest when rates remain unchanged as when they move[1]. While there appears to be general agreement that the MPC has worked well in the economic conditions which have recently been seen, there is a case for probing the efficacy of its procedures to ensure that they are sufficiently robust to stand the test of more trying economic, or indeed political, conditions. There is also a need for continuing vigilance at a time when complacency could emerge, as everyone thinks everything is going smoothly. In addition, there are those for whom further education in the working of the MPC will continue to be of value.

2.  We consider that this report will make a contribution to the continuing debate about the work of the MPC. We also believe, however, that, in line with the Government's commitment to more open and accountable decision-making on monetary policy[2], Parliament must remain significant in the new arrangements for monetary policy. The members of the MPC are not, unlike the Chancellor of the Exchequer when he used to set interest rates, directly accountable to Parliament as ministers; nor are they directly accountable to the electorate as members of the House of Commons. There is accordingly a need for Parliament, and by Parliament we mean both Houses, to ensure that procedures are put into place to scrutinise and report on the work of the MPC. We include in such scrutiny, scrutiny in the non-partisan atmosphere of the House of Lords. Arguments about openness and scrutiny also, in our view, apply just as strongly to fiscal policy not least because of the need for co-ordination between monetary and fiscal policy, on which we say more in paragraphs 19-23 below.

3.  It is against this background that the House of Lords agreed to appoint our committee for a second time. The Committee members are listed in Appendix 1. Our previous report[3] came after an intensive period of evidence and deliberation during early 1999. When we were appointed again[4] we decided to proceed on a similar basis, namely hearing evidence from a wide range of those with a direct interest in the work of the MPC, before reaching our conclusions. Our witnesses are listed in Appendix 2. We are, as before, very grateful to all our witnesses for the time and effort they have taken to come and share with us the benefits of their experience. All our witnesses attended voluntarily and willingly. Our conclusions are based on the evidence that we have heard, which is published as Volume II of this report but also summarised in the text. References in the form (Q 00) or (p 00) are to questions or pages in Volume II.

4.  We are also very grateful to Professor Mike Wickens of the University of York for taking the time to assist us during our inquiry, as he did during our previous inquiry. We much benefited from his clear and thoughtful analysis of the issues we have considered.

5.  Looking ahead, the House of Lords has decided to appoint a permanent sessional committee on economic affairs. Now that we have made our report to the House, we expect that this new committee will begin its work. Although the work of the new committee will be much wider than ours, we consider that issues around monetary policy and the role of the Bank of England will remain of significance. We would therefore hope that the new committee will, among its many other responsibilities, pay detailed attention to these issues. In particular the new committee may wish to hold annual meetings with the Governor and ministers to scrutinise the continuing operation of monetary policy. During the course of this report we also identify a number of wider issues on which we heard evidence but on which we, as a committee with a limited remit, do not feel able to take further evidence and to come to firm conclusions or make appropriate recommendations. We would hope that the new Economic Affairs Committee, when appointed, would, in considering its programme of work, give detailed consideration to these suggestions and carry at least some of them forward, as well as tackling wider issues such as globalisation and debt management.

6.  In examining the work of the MPC, we have been very conscious of the work done by the House of Commons Treasury Select Committee. That Committee has conducted direct scrutiny of the work of the MPC but we consider that our report will complement, rather than overlap with, theirs. This is because we have tried to avoid duplicating their detailed consideration of specific interest rate decisions and because we have not undertaken, as the Commons Treasury Committee has done, confirmation hearings of individuals appointed to the MPC[5], nor would we wish to do so.

7.  In this report we have also not covered issues that we consider to have been thoroughly dealt with in our First Report. These include a number of questions of general background, which we did not see any need to repeat in this report. For example, our previous report covered in some detail the story of the establishment of the MPC; an account of the history of inflation and interest rates, both in the United Kingdom and internationally; and an analysis of the meaning of section 11 of the Bank of England Act 1998[6], a section which includes much-discussed provisos on the MPC's objectives. All these are matters which we hope our readers will find fully covered in our previous report and for ease of reference, the box on page 7 sets out our previous conclusions[7]. On the other hand, there have been a number of significant developments since our First Report and we reflect these in this report. Of particular note has been the maintenance of stable interest rates for a considerable period.

8.  This report takes the form of a number of chapters, each dealing with a particular area of interest. As we consider the evidence we received on each topic, we also draw some general conclusions. Chapter 6 draws together our conclusions and recommendations but we would hope that the more detailed analysis and argument, and summary of evidence, in the earlier chapters will inform readers' analysis of our conclusions.

Recommendations from our First Report

1.  The Government was right to give operational independence for monetary policy to the Bank of England, and to place it on a statutory basis (paragraph 7.3).

2.  The Treasury and the Bank of England have a duty to monitor in detail the performance of the Monetary Policy Committee, and to publish their assessment of it (paragraph 7.2).

3.  We agree that an inflation target of 2.5 per cent is appropriate at this time (paragraph 7.6).

4.  There is a need for further clarification by the Treasury on the "subject to that" part of Section 11 of the Act (paragraph 7.7).

5.  We are less than clear whether the decision procedure of the Monetary Policy Committee is more an art than a science. They must make their procedure clearer so as to aid public scrutiny, and re-examine this procedure in order to remove any possible bias (paragraphs 7.9 and 7.11).

6.  Appointments of the independent members of the Monetary Policy Committee must be made in a more open fashion. Such appointments should be for five years and normally non-renewable (paragraphs 7.13 and 7.14).

7.  More attention should be paid to the reasons for interest rate differential between our interest rate and that set by the European Central Bank (paragraph 7.10).

8.  The Court needs to make full use of its powers with respect to the Monetary Policy Committee, and could play a more active role (paragraph 7.16).

9.  The Office for National Statistics needs to play a more active role in dealing with all the problems that have emerged in connection with the measurement of inflation, and especially the role of the harmonised index of consumer prices (HICP) (paragraphs 7.17—7.20).

10.  Clarification is required of the part that the external value of sterling plays in the transmission mechanism of monetary policy to the real economy (paragraphs 7.22—7.23).

1   Appendix 4 shows the movement of rates since the MPC began its work. Back

2   The 1997 Labour Party Manifesto stated "we will reform the Bank of England to ensure that decision making on monetary policy is more effective, open-accountable and free from short-term political manipulation". Back

3   Referred to in this report as our First Report and published as House of Lords Paper 96-I: Report from the Select Committee on the Monetary Policy Committee of the Bank of England, Session 1998-99 (27th July 1999). Back

4   On 6th March 2000. The Committee was appointed as a one-year ad hoc Committee and formally re-appointed on 12th December 2000 at the start of the current session. Back

5   We draw readers' attention to various reports of the House of Commons Treasury Committee, including their report "The Monetary Policy Committee of the Bank of England: Confirmation Hearing" (7th Report from the Treasury Committee, Session 1999-2000, 23rd May 2000, HC Paper 520); and "The Monetary Policy Committee - Two years on" (8th Report from the Treasury Committee Session 1998-99, 20th July 1999, HC Paper 505). These reports follow the Treasury Committee's Report "Bank of England: Operational Accountability - one year on" which was produced on 15th July 1998 (HC Paper 993 Session 1997-98). Back

6   1998 c 11. Back

7   The Government's response to our First Report, and a response by the Bank of England, are published in Appendix 5. Back

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