Select Committee on Treasury Ninth Report

I  Introduction

1. The establishment of an operationally independent central bank was the first major policy decision announced by the Chancellor when the Labour government took power in May 1997. The Chancellor set out a framework whereby he would continue to set the objectives for monetary policy, in the form of an inflation target, but the Bank of England, and in particular a nine-member Monetary Policy Committee (MPC), would be given immediate operational responsibility for setting interest rates to meet the inflation target. The arrangements were initially put in place on a non-statutory basis before being given legal backing on 1 June 1998, when the Bank of England Act came into force.

2. The Act mandates the MPC to "maintain price stability and, subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment."[1] Throughout the course of this Parliament the Chancellor has defined price stability to be an annual rate of increase of the Retail Price Index excluding mortgage interest payments (RPIX) of 2½ per cent. In addition, the Act ensured a greater degree of transparency in decision making by requiring the publication of the MPC's minutes and individual voting records. The Act also re-structured the Court of the Bank to make it more representative of the whole of the UK and to take account of a broad range of industrial and business sectors.

3. The MPC is accountable to the Government for its remit, to the Court for its procedures and to Parliament for all aspects of its operations through regular reports and evidence given to this Committee and the House of Lords Select Committee on the Monetary Policy Committee. This report is our assessment of the performance of the MPC over the course of this Parliament, analysing both its performance against target and the framework in which it works. We also assess our own role in the process. In preparation for this report, in addition to our regular hearings with the MPC, we also took evidence from some of the Non-executive Directors of the Court of the Bank of England (NEDCo), and a range of experts on monetary policy, including some former members of the MPC. We would like to thank all those who gave evidence, in particular Mr Don Kohn, of the US Federal Reserve, who travelled from America especially to give evidence to the Committee, and our specialist advisers, both past and present, on monetary policy, Professor Charlie Bean, Mr Roger Bootle, Professor David Miles, Ms Bridget Rosewell, Professor Andrew Scott and Mr David Walton.

4. The report is divided into four sections. First, we set out the methodology we intend to follow in making our assessment of the MPC and apply it to examining the performance of the MPC. Secondly, we analyse the various components which make up the broader monetary framework. Thirdly, we assess our own performance in meeting the objectives we set ourselves at the beginning of the Parliament. Finally, we look at wider economic policy issues which have arisen over the last four years.

1  Bank of England Act 1998, section 11. Back

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Prepared 28 March 2001