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


Voting Methods

24.  As far as the voting methods of the MPC are concerned, our First Report concluded that the MPC's method of voting was not satisfactory and should be examined. The problem arose because the process is sequential so that later voters know what the predecessors have done. In evidence, the Governor explained to us that the meeting at which a vote was taken was preceded by a separate discussion of the issues, which was always "very interactive". At the actual voting meeting, Mervyn King spoke first and the Governor then took great care to ensure that the order of voting was genuinely random, even though people sat in the same seats (Q 1258). We remain to be convinced that the process is sufficiently robust. We recommend that the Governor, and the MPC itself, gives further attention to the voting procedure and in particular to a system of simultaneous voting.

Frequency of MPC Meetings

25.  The MPC is required[15] to meet "at least once a month". After each meeting, the MPC announces a monthly decision on interest rates, followed a little while later by a monthly publication of minutes of the meeting at which those decisions are taken. Publication is now much sooner after each meeting than was the case when the MPC was first set up. We commend the MPC for the prompt publication of the monthly Minutes.

26.  We asked our witnesses what the effect was of having monthly meetings. Martin Temple, Director General of the Engineering Employer Federation, thought perhaps there had been too many meetings and the MPC should look at plans rather than reacting to monthly figures: the present position was something of a knee-jerk (QQ 459, 488). Sir David Lees, Chairman of Tate & Lyle, however, was happy with the present situation as the MPC were "updating every month_their own assessment of how [the] situation has developed with all the new data that has accumulated in the last month" (Q 488). The TUC too were relaxed about a monthly cycle as "little and often" was the best policy (QQ 542—4). Professor Charles Goodhart (at the time an MPC member) pointed out that the effect of monthly meetings was that interest rate changes would be small as "not an enormous amount happens from one month to another" (Q 111). Kate Barker, Chief Economist of the CBI thought that at the time she gave evidence (9th May 2000) the by then regular small changes in interest rates had been unhelpful as the financial markets were continually expecting more small rises and this might have had an irrational effect of being a factor pushing sterling up. Furthermore, as expectations had arisen that the MPC would, if it did act, act in quarter per cent steps, people would need to be prepared for any decision to move to a half point rise at any particular time (QQ 250—252). Professor Charles Goodhart pointed out (Q 115) that as the MPC reacted to news, if there was a sudden jump of three-quarter per cent, then there would have had to have been some news, which would have been public anyway. The psychological effects of sudden larger changes in interest rates were accordingly unclear (QQ 112—115).

The MPC Minutes

27.  In our First Report, we praised the MPC for the transparency of their Minutes[16]. This theme was picked up in the debate on our report by our former member, Lord Ezra, who praised "the remarkable and exceptional degree of transparency in the Minutes of the MPC"[17]. The Commons Treasury Select Committee too has praised the clarity of the Minutes[18]and this has been taken up in evidence to us (for example by the CBI in Q 232). The Governor explained to us that such transparency was important as it enhanced public understanding, including market understanding, of the nature of the issues. The Bank had become more confident in being transparent and open and this had been reflected in the more speedy publication of the Minutes after each meeting. Mervyn King said that many manufacturers, even when not approving of the Bank's decisions, said that they appreciated the openness and transparency of the policy (Q 151). John Monks, General Secretary of the TUC, however, did not actually read the Minutes but made do with what he read in the press (QQ 576—7). Business leaders too admitted to us that they do not read the Minutes (Q 1045).

28.  Ian Plenderleith (an Executive Director of the Bank and a member of the MPC) told us that it was "a very real challenge" to communicate to the general public an understanding of the MPC's work and that members tried to get out and about to supplement the documents that were published (Q 645). The Commons Treasury Select Committee too welcomed the Bank's effort to explain the work of the MPC and has encouraged it to devise new ways of enhancing public awareness[19]. Kate Barker from the CBI confirmed that the business community welcomed the many opportunities to talk with members of the MPC (Q 232).

29.  We noted that MPC members do often give public speeches and lectures and produce public research documents. David Clementi (a Deputy Governor of the Bank and another member of the MPC) confirmed to us that the MPC had a process for planning forward speaking engagements, both to avoid clashes and to ensure uniform attendance in the regions. There was, however, a purdah period around the time of the monthly interest rate meetings and around the time of the inflation report. He said, "beyond that, we are clear that there is no gagging and people are free to speak. Some people inevitably, as in other walks of life, speak more than others" (Q 614).

30.  The Minutes of the MPC have referred several times to differences of opinion among its members about the inflation forecast. There may appear to be a puzzle about these differences. If nine rational people are assessing a single target — the projected rate of inflation — against the background of a forecast they have all agreed why don't they reach the same conclusion? There can be a number of explanations. Are members disagreeing on the actual inflation forecast as such? Do they differ in the significance they attach to the range shown in the fan charts? Or do they disagree on the policy conclusions arising from the forecast? So each member forms a judgement and votes accordingly, although, as discussed in the following paragraphs, it can be hard to pin this down, as the Minutes do not directly connect an individual's vote with the reasons behind it. Such connections would be of particular value in assessing the MPC's forecasting record, which we discuss in Chapter 4.

31.  Given the Bank's acceptance of the importance of transparency, and given the willingness of individual MPC members to speak on their work in public, we asked witnesses why the Minutes were not able to say who advanced which arguments even though they do indicate which members voted which way. Our evidence was divided on whether views in the Minutes should be attributed to individuals. Professor Willem Buiter (then an MPC member) thought that each MPC member should, as a contribution to accountability, have their own paragraph in the Minutes explaining why they did what they did (Q 42, a view supported by Sir David Lees, Q 505). Professor Charles Goodhart, on the other hand, thought any such attribution might make members more rigid and less willing to react to each other's arguments, a view supported by two other MPC members, Dr DeAnne Julius and John Vickers (then an Executive Director of the Bank) (QQ 41— 44). The Governor too took the view that attribution would risk stifling "interactive, freer-flowing debate" (Q 214) while the TUC saw a risk in encouraging the egos of individual personalities sticking to their opinions (Q 580). The Chancellor suggested two reasons for not attributing views to individuals: that attribution could encourage opinions to be prepared in advance, thus detracting from the dynamic of the MPC; and because attribution would turn the Minutes into press releases for individual MPC members (QQ 1202—4). Ed Balls argued that scrutiny by Select Committee was a better way of getting at why individuals voted as they did (Q 1205). David Clementi tried to reassure us that, in many cases, given the publication of the voting records, it was often possible to match up individuals with views expressed. To do more would increase the length of the Minutes and lead to agonies about wording. He was satisfied that the process was indeed fair and transparent (Q 615).

32.  In our First Report, we suggested[20] that the Minutes should place more emphasis on what was decisive in the reaching of a particular decision, and whether that was decisive for all members; and what it was that caused any member to change their view during discussion. The Treasury Committee in the Commons[21] remains to be convinced that members' views should not be individually ascribed.

33.  The Governor, on the other hand, said that he had been "perplexed" by suggestions that individuals' views were not in fact already clear from the Minutes (Q 1259). We accept that the Minutes would be more boring if there were a blow by blow account of each meeting of the Committee and we accept the Governor's view that the Minutes should not degenerate into self-justification by individual members (Q 1259). We also recognise the importance of individual members listening to each other and possibly changing their views. We are bound, however, to say we are puzzled by the Governor's perplexity. The votes of individual members are clear. What is not are the precise reasons for them. The relevant question is whether, since the votes of the individual members are not secret, it would be unreasonable for them to explain, albeit briefly, why they voted as they did. This is not a matter of having an entrenched position which needs to be justified. It is simply an aspect of transparency.

34.  Knowing why individuals were persuaded to move in a particular direction, however, would not only contribute to transparency and an understanding of why decisions had been taken by the Committee; it could also help the MPC and others in reviewing decision-making. In our First Report, we recommended that more emphasis be placed on what caused an MPC member to change their view during a meeting[22]. Given our concerns, expressed in paragraphs 39 and 40 below, about the lack of self-analysis by the MPC, we now add to that a recommendation, that any MPC member wishing to offer a short paragraph by way of explaining their vote should be encouraged to do so.

35.  Another change to the Minutes that has been suggested is that they should include a hint of the direction in which the MPC thinks things are moving. There are two aspects of this. One is to indicate what the MPC believes the likely trend of inflation to be. The other is to reveal what the likely trend on interest rates is. The latter follows from the former. It follows that what the markets need most is something authoritative and additional on the former. In our First Report, we concluded that, "it is too early to say that the MPC ought to anticipate policy by indicating what it is likely to do in the future following on what it has just done"[23]. We now consider, on reflection, that there is a case for the MPC giving such clues, because it would help those taking decisions on whether to invest in projects over the coming months to know whether or not the trend of interest rates was up or down. We note that the Commons Treasury Committee has encouraged the MPC to consider whether to adopt the approach of the US Federal Reserve in announcing the bias of future decisions[24], although since that recommendation was made the Federal Reserve has changed its practice (Q 605).

36.  This view was rejected by most MPC members who gave evidence to us. The Governor and Professor Charles Goodhart talked of the danger of misleading the markets, the Governor on the grounds that he really did not have much idea of what was going to happen to interest rates (QQ 121, 214). Dr DeAnne Julius thought it would be "virtually impossible for a Committee of nine independently accountable members to come up with the Committee view as to where this is going in the future" (Q 118), although Professor Willem Buiter thought it should be no harder to predict the MPC's behaviour than to predict inflation and output across the economy as a whole (Q 121).

37.  We see the drawbacks to indicating the possible future direction of interest rates. Any difficulties that the MPC members have in agreeing on the current interest rate would be greatly magnified in trying to agree on a future path for interest rates. A case can also be made for saying that identifying a path might weaken faith in the expectation that the target will be met; and could tie the MPC's hand for their next meeting. Announcing a path might also have an effect on market stability, and there is a danger that anticipation that did not turn out to reflect events might be thought to have been misleading the markets, also weakening faith in the MPC. On the other hand, the record of votes in the Minutes has in any event begun to be presented in a form which gives hints of the probable future path of rates. And our analysis later in this Report suggests another reason why the current procedure may be untenable. At present when making its inflation forecast, the MPC assumes that interest rates will remain constant over the next two years. If the MPC were to make the more realistic assumption that interest rates would change, then there would be a need to discuss their future path in the Minutes. The argument for not doing so therefore rests largely on the fact that they are assumed to remain unchanged. We conclude that it would be for the benefit of the real economy, and of real and individual investment decisions in that economy, for the uncertainty surrounding the path of interest rates to be reduced. We accordingly recommend that where the members of the MPC agree that it is appropriate to do so, MPC members should feel able to give an account of the direction that interest rates are going and that if, in some months, it is only possible to say that X members thought rates were going up, Y thought they were going down, and Z thought they would stay the same, this information would nevertheless considerably enhance the usefulness of the Minutes. This could also provide the basis of an executive summary of the Minutes, a proposal raised by our witnesses to which we urge the Bank to give consideration in the interests of accessibility and readability.


38.  We have already noted that MPC members individually make speeches and present papers that enhance their accountability to the outside world, and we were pleased to note the positive response by the business community to the contacts they have with MPC members (for example QQ 232, 504). We were, however, surprised to hear evidence from a number of journalists who write on financial matters for serious newspapers to the effect that the MPC was not as open to the media as it could be. Clearly it would be difficult for all members of the MPC to satisfy all demands from the media, and some will be more comfortable and experienced in dealing with journalists than others. The Governor gave us some indication of the scale of media demand in telling us that 205 interviews had been granted in a 12-month period (Q 1263). He told us that allowing any journalists access to any MPC member at any time would be "unmanageable" (Q 1265), with which we agree, but also that decisions on media contacts were left to individual members of the MPC and some were more willing to give interviews and lunches than others (QQ 1272—3). This is more questionable, since it is an important part of the duties of MPC members to explain their views in a thorough and non-discriminatory way. Such a duty requires all of them to make themselves accessible to a reasonable degree, through press conferences and other activities. The press, the public and Parliament will not be as well disposed towards the Bank as they are now if we come to a time when domestic conditions are felt to be less benign. Goodwill should be stored up now for more difficult times, if the Bank is to retain public support for its decisions. The bias on the part of the individual members of the MPC should be in favour of responding to serious inquiries from the press. We recommend that the MPC should adopt a formal commitment to explain and educate, and pursue a consistent, open and non-discriminatory approach to its relationships with the media. New members of the MPC should receive appropriate support and training to help them fulfil this part of their function.


39.  We asked the Bank what work was being done to analyse the work of the MPC. The Governor stressed that consideration would be given to whether any changes could be made and the process was kept "under pretty continuous review" (Q 1253). The Treasury has reviewed whether the Bank was delivering the remit set by the Chancellor but Sir Andrew Turnbull expected the Bank itself to examine questions such as whether the Bank had been too active, whether their operations were working in detail etc (QQ 277—280). The Chancellor stressed that he welcomed continuing work on the monetary policy regime: "we are vigilant_ and we should be more vigilant in the future" (Q 1228).

40.   In this regard, we were pleased to be able to examine the report by Donald L. Kohn, Senior Economist at the Federal Reserve Board, Washington, for the Court of Directors, on the work of the MPC, published in December[25], although this came too late in our inquiry for us to raise it with any of our witnesses. We recommend that the new Economic Affairs Committee gives careful consideration to that Report, if a decision is taken to explore monetary policy issues with the Governor, the Chancellor and others, from time to time over the coming years. Clearly, in a few years time the successor to this committee together with the House of Commons Treasury Committee will also be in a stronger position to carry out a definitive study of the work of the MPC.

15   By Schedule 3 (10)(1) to the Bank of England Act 1998. Back

16   Paragraph 7.9. Back

17   HL Deb, 4th November 1999, Col 1002. Back

18   Op.Cit. n8 above. Paragraph 31. Back

19   Op.cit. n8: Paragraph 33. Back

20   Paragraph 7.9. Back

21   Op.cit. n8 paragraph 39 Back

22   Paragraph 7.9. Back

23   Paragraph 4.44. Back

24   Op.cit n8 above. Paragraph 28. Back

25   The Report is available on the Bank of England website: Back

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