Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 1 - 19)




  1. Welcome. Would you like to introduce your team?
  (Baroness Noakes) Certainly. On the extreme right, Sir Ian Gibson, next to me on my right Frances Heaton, Sheila McKechnie on my left and on my far left Bridget Blow, all of whom are non-executive directors of the Bank. You have the whole range from one of the newest in Bridget Blow to the most senior in Frances Heaton.

  2. The Bank of England Act gave the non-executive directors certain specific functions. Can you remind us what they were?
  (Baroness Noakes) The non-executives have very specific functions: to review the performance of the Bank against its objectives and strategies, to monitor its financial management objectives, to review the Bank's internal financial controls. We have to determine how the pay of the governors, that is the governor and the two deputy governors, is set and we have to set the pay for the Monetary Policy Committee (MPC) members. We have to review the MPC's procedures including whether or not adequate regional and sectoral information is gathered for the purposes of monetary policy setting and on top of all of that we report on those responsibilities once a year, our report being included in the Bank's annual report.

  3. That is really quite a lot of responsibilities.
  (Baroness Noakes) Quite a lot of responsibilities though most of those responsibilities are in the nature of review/monitor responsibilities, not taking responsibility for setting objectives and strategies; that is part of our collective responsibility within Court. We have particular responsibilities to review the performance, most importantly then to write about it in the context of the annual report, which we do.

  4. From our point of view I suppose the most important part of your remit is the fact that you assess and monitor the procedures of the MPC.
  (Baroness Noakes) That is the most onerous part of our responsibilities.

  5. Can you tell us anything about that and what areas for improvement you have identified?
  (Baroness Noakes) What we do in reviewing the procedures of the MPC is look at a whole range of aspects of how the procedures actually work, starting with defining what those procedures are and then going through a range of activities which includes the monthly report of the MPC to Court as required by statute and all of the members of the MPC attend Court for that. We attend the pre-MPC sessions, we have annual discussions with each member of the MPC and the Treasury's representative about how they see the procedures working. We look at things like the minutes of the meeting which come out monthly, we look at the inflation report and discuss those with members of the MPC. We look at the work of the regional agents, which I know this Committee has looked at in the past, and then we look at what kinds of information flows, in particular regional and sectoral information flows, are going to the MPC. Then we do things like external reviews. In the past for example we have discussed with the IMF when they have been over what their views of the procedures which have been adopted by the Bank are. You are aware that over this year we commissioned via the Bank a report by Mr Don Kohn, who is Director of Monetary Affairs at the Federal Reserve Bank in Washington, to come to look at the procedures, very specifically to give us an external perspective on the procedures. I would say that it is a process of regular review and regular discussion with the MPC members. Our most important concern is to make sure that they see the procedures as a live issue, that is that they themselves keep under review how they do things, they challenge what they do themselves and are on a path of constant improvement. For us that has been one of the most encouraging features of what we have found. When you ask me what areas of improvement we have identified, the most important thing has been to identify with the MPC that they are an organisation which believes in constantly reviewing how they do things. If you look at the three years since they have been operating de facto—two and a bit years since they were set up by the Bank of England Act—there have been quite a lot of changes in how they do things. Even over the last few months they made a number of changes in how they handled data and pre-MPC process, how they pull information together for the quarterly forecasting round, partly in response to their discussions with Don Kohn, but also partly in response to themselves constantly questioning what they do. We have seen this very much as a continuum. Would any of my colleagues like to add where they see the main areas of development have taken place?
  (Ms McKechnie) The regional data. We do meet with the agents once a year and when we had a meeting with Don Kohn to discuss his draft report before it was published we asked him specifically what he thought of that. He was extremely complimentary. The information is not statistically valid in the same way that a long-term survey would be valid but it is good intelligence. His general view was that it is better intelligence than the Fed gets.
  (Sir Ian Gibson) I would support what Ms McKechnie says. What we encourage and what we certainly see is the process of debate and review of what is taking place, of how it is working and what is being done. Given that there does not appear to be a single formula applicable worldwide on how to run a central bank or how to run the equivalent to an MPC, whatever you might call it, a markets committee, having that debate and having that review is perhaps the most important single part of the committee duties, apart from picking a number each month. It does that and we are part of that process.

Mr Ruffley

  6. On page 57 of the Bank's annual report you say that the Monetary Policy Committee's procedures operated satisfactorily during the year March 1999 to February 2000. You will recall that in October 1999, quite a row was publicised in the Financial Times over support that the MPC was getting in terms of research. Given that row, I wonder how you could possibly come to the conclusion that the procedures were satisfactory? Could you give us your thoughts on that?
  (Baroness Noakes) Certainly. The row, as you put it, which got into the newspapers was part of a series of discussions which had been going on since the summer, which was when the non executives became aware of the issue which was a set of discussions between the external members of the MPC and the Bank about the level of personal resources they should have dedicated to them. Those discussions went on during the autumn at which point the so-called "row" got into the newspapers. It was solved I believe to the satisfaction of all parties, in particular the external MPC members, by December. That was a series of discussions about what level of resource was appropriate for personal support and also wrapped up a number of other issues which had probably lacked complete clarity at the time which was the way in which the research programme, drawing on the resources of the whole bank, should be set both on a short-term basis and on a long-term basis. By December a whole load of things had been pulled together on the nature of personal resources and the way in which the overall research programme went. At no point during that was it ever suggested that the process of setting monetary policy was harmed; indeed one of the things when I spoke to every individual member of the MPC—and I did speak to them at least once during that period of seven months as well as speaking to them collectively—all of them said this was a set of discussions which was going on outside the committee room of the MPC and that the setting of monetary policy was not affected by that. It was simply an issue which needed to be resolved and was resolved by Christmas. When we came to our report the following April, we certainly looked at that and we encouraged the Bank to be quite explicit about how that process had gone on in its review of monetary policy procedures, which is slightly earlier in the annual report. That was a full explanation of what went on. In the light of that full explanation and bearing in mind that we found no harm done to the process of setting monetary policy, we found it relatively straightforward to reach the conclusion that we did. I do not think anybody can pretend that everything is going to be perfect all of the time. It got blown up a little out of proportion when it got into the press, but something had to be actively solved and was.

  7. I thank you for that answer, but you will know as well as I do that if things like that get in the press, first of all it is deeply unedifying and whoever was putting it in the press did it for a reason. It was a symptom of deep concern if not anxiety about how the procedures were operating in terms of making representations for more support and that not being forthcoming. Things like that do not get into the press unless there is concern. What I should like to ask you, following on from your reply, is why you did not pick up this concern and defuse it before it reached the press? Is there something wrong in your information gathering system or are you happy with it?
  (Baroness Noakes) We have a process which has roughly an annual cycle to it of satisfying ourselves that the MPC procedures are operating effectively and as you know it led to the report we made in May 1999 on that. As a runup to that, on behalf of the non-executives I spoke to every single member of the MPC at the time about their perspective, including the amount of resources which were made available to them. We have a series of key questions: one of them is about the adequacy of resources. At that stage there were some minor concerns about resources: they were not major concerns about resources. Then there is a change in appointment and the balance between full-time and part-time members shifted during the summer. The first I became aware of there being an issue was in August, which was only shortly after the issue started to be discussed with more intensity. In April I was quite clear there was not an issue. By August there appeared to be some genuine concern. The response to that was to ensure that was going to be discussed fully and properly within the Bank and indeed that is what started to happen. I cannot answer your question about who put it into the press and why they put it into the press, because I do not know the answer to that. As far as we were concerned when that went into the press, a series of meetings was already scheduled, discussions had already taken place, more were to take place, there was something which was a process we could see was leading to a solution. So we do not feel we were late into it, nor that anything serious had gone wrong, other than versions of what went wrong, what was in the press and I fully agree with you that it was very, very lamentable, because nobody ever wants to run their business through the columns of a newspaper.

  8. I thank you for that reply. May I follow that up by asking you to say something about the formal arrangements for the MPC to determine collectively the priorities for research and analytical work which you talk about in page 28 of the annual report? Can you say something about what those formal arrangements are and how they operate?
  (Baroness Noakes) As I understand it, there is an annual cycle to that. There is a formal process of setting those priorities once a year where the MPC take part in discussions with the staff from Monetary Analysis division (MA) and people are putting forward different projects and there is a process of collective prioritisation to decide what the priorities should be. Every quarter, at the end of the inflation forecast round, there is a separate meeting, again the MPC with staff from MA, which asks what the issues are where real progress can be made by the next forecast round, which is the short-term research. Between the two there are some things which you know you cannot solve in one forecast round which will run a little longer. I do not know whether I can help beyond saying that as I understand it, it is a fully collective process involving all members of the MPC and relevant staff of the Monetary Analysis division of the Bank.
  (Mrs Heaton) It is a formal process in that the MPC members meet on a regular basis to discuss the research priorities.

  9. The only reason I asked this question is because it was the Court which introduced these arrangements. What I do not understand is how you monitor these arrangements and how you pick up any concerns and whether or not you have any role in resolving any disputes. I understand it is collectively done by the MPC, but this is a system which you put in place. I should like to know what role you have in monitoring the operation of the system you put in place.
  (Baroness Noakes) We approved that system being put in place, which was the process of the many discussions which took place largely between the MPC members themselves. That was something carved out from that process and we approved that as a way going forward. We review that formally once a year because that needs to lead into our annual report. As I mentioned to you, one part of that process is for me to see every single member of the MPC individually to make sure there are no individual concerns which are not surfacing in a collective discussion. In addition we see the MPC members every month at Court; not all attend every month but a lot do attend most months. We see them then and have an informal opportunity to hear whether there are any particular concerns about what is happening. We also meet them on other occasions as well. It is a combination of the informal interaction with members of the MPC, all of whom we know well because we see them regularly, and a formal review once a year. In addition I know that several members of the MPC would have no trouble in calling me if they wanted to discuss a particular aspect because they have done that in the past; in particular when there was a discussion about level of resources a couple of them did phone me directly. I do not find that there is an absence of channels.

  10. I find that a very helpful answer. Could you just tell us what happens if you get a call from an individual member? I am talking hypothetically of course, if you got such a call and the individual member or the members who rang you said frankly they were outnumbered and they wanted more work done on hedonic pricing or whatever it might be. You get the call. What role do you and the Court have in trying to resolve that, because someone comes to you and says they are actually a minority in the MPC, collectively the rest do not want this work to be done and they think it is absolutely critical? Is there a role for the Court in that?
  (Baroness Noakes) That bit is really quite hypothetical because I think you are saying there are four external members and five bank managers and there is a ganging up. In my experience there has been no sense of that. I have never had it suggested that there is a Bank view, for example on research.

  11. No, no, you misunderstand me. I am not talking about people ganging up. I am just talking about one or two or maybe three members of the MPC who want a bit of work done and it is viewed as not being especially important, not a good use of resources. They come to you, they ring you up and they say they do not think it is right. Do you have a role or not, or can you just be someone on the end of a phone?
  (Baroness Noakes) I should try to find out what the nature of the real problem was. I would go to see them or arrange to see them next time I was in the Bank or whatever, or any one of my colleagues would, because it is not just me who talks to members of the MPC, we all interact with them. If you take the research issue, the arrangements which were put in place last December were designed to deal with that point, which is that for the collective resource the Bank has at the disposal of the MPC there is a collective prioritisation process. If members have things they particularly want to do like hedonic pricing and the rest of them do not, that is why they now have dedicated resources, one junior and one senior economist each, for each member of the MPC available to them to do their particular research needs. There may come a point where they say to us that they need more to do their particular research but they have not done that.

  12. Those are individual researchers who are dedicated to each member.
  (Baroness Noakes) Yes; absolutely. They are designed to meet those research requirements identified by individual members which do not fit in with the collective prioritisation as set by the MPC as a whole. What I am trying to say to you is that question should not come to me.

  13. That is helpful. So an individual member may have a particular interest which is not necessarily shared by the rest of the MPC in their collective discussions, but nevertheless can use the full-time resource of two researchers.
  (Baroness Noakes) Yes; two researchers.

  14. On that non-collectively agreed bit of work.
  (Baroness Noakes) Absolutely.

  15. That is very, very helpful. Are you aware of any concern among MPC members about lack of work being done on the new economic paradigm, the new economy and all that huge amount of research which will have to be done by someone sometime? Are you aware of any complaints that not enough is being done by Bank economists on that topic?
  (Baroness Noakes) No, I am not aware of that. I do not know whether my colleagues are. It is a big issue and it is talked about a lot. I have not heard that complaint.
  (Ms Blow) There is evidence that a lot of work is going on to try to bottom this out so they are focused on that as an issue but there are no complaints.
  (Mrs Heaton) I would say not a complaint but debate. It will be one of the things debated by the MPC as to the priority to be given to that element of research. To the extent individuals think that agreed line is not enough, then they will devote their own resources to supplementing that. They have to debate that in the MPC and see whether they win the day.

  16. Are you aware that any individual members have actually decided to commit their own personal research effort into new economic paradigm research?
  (Mrs Heaton) I am not aware of the individual priorities.
  (Baroness Noakes) I do not know what they are working on.
  (Ms McKechnie) I may be wrong but I think there is a specific research group which has been set up under DeAnne Julius which is looking at that whole area.

  17. Is that using just her individual researcher?
  (Ms McKechnie) No, I do not think so.
  (Baroness Noakes) We will have to ask the Bank for an answer to that.

  Chairman: Perhaps you would drop us a note on that.

Mr Ruffley

  18. It is the case therefore, judging from what you say, that you do not specifically monitor the individual research efforts of MPC members and you leave that to their discretion.
  (Baroness Noakes) Absolutely.

  Mr Ruffley: That is a very helpful set of answers.

Mrs Blackman

  19. In the Bank annual report in 1999 you flagged up that the number of staff working in Monetary Analysis was targeted to rise by 20 but only rose by 13. By the following year the report is not only flagging up this same deficit but also flagging up that the average level of experience is not perhaps what you might have expected. How concerned are you about the lack of experience of staff in this area in terms of supporting the MPC?
  (Baroness Noakes) When we last looked at it, which was last month or the month before, the numbers recruited to MA were now satisfactory in terms of economists. There may be some gaps in some support areas but in terms of economists the numbers are there. Of course if you have a big recruitment programme and get numbers, that often means you have younger staff, certainly less experienced in Bank terms. The issue now is to try to retain those staff, to keep them so that the experience level will increase. Much of the anxiety about that situation has at least temporarily disappeared and we are hoping that by the time we do the report this year, that is when we get to the end of February, we shall be able to report on a situation which is more positive though not without problems, because you correctly highlighted the nature of the younger profile of the less experienced. That is something the Bank needs to manage, it needs to manage to hold those people so that in a couple of years' time that will not be an issue either.

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