Select Committee on Treasury Second Special Report


GOVERNMENT RESPONSE TO THE TREASURY COMMITTEE'S NINTH REPORT, SESSION 2000-01: THE MONETARY POLICY COMMITTEE—AN END OF TERM REPORT[1]

Assessing the performance of the MPC

(c) We commend the MPC on establishing a high level of credibility; however we are concerned that in an effort to establish such credibility the MPC may have biased policy towards undershooting the target. We would therefore remind the Governor of his assurance to us, in November 1998, that the MPC will be "just as active, rigorous [and] aggressive in pursuing inflation at 2.5% if there is a balance of risks on the downside as we had been on the upside" (paragraph 12).

Since the inflation target is symmetric, the best way of establishing credibility is to remain as close to the target as possible. The MPC has a strong track record. RPIX inflation has been very close to target since May 1997; over that period it has moved within a narrow range of 1.8-3.2 per cent and has averaged 2.4 per cent.

(e) We believe it was correct to require each individual vote to be recorded but note that so far differences in the broad voting patterns are minor (paragraph 18).

The Government welcomes the Committee's support for the publication of individual voting preferences, as required by the Bank of England Act 1998, section 15(4).

Assessing the monetary framework

(f) It is perhaps a measure of the success of the monetary framework that there is now broad political acceptance of it (paragraph 19).

The best indicators of the success of the new monetary framework are low and stable inflation and interest rates and the enhanced credibility of monetary policy shown by low inflation expectations. Its widespread acceptance shows the new framework is working.

(h)  We commend the Bank on the way in which it has sought to disseminate information on the policy and actions of the MPC. However, ... public expectations of the inflation rate remain approximately a percentage point above the target and hence we would encourage the Bank to continue to think of ways in which they can broaden the reach of their information campaign (paragraph 22).

The Bank's information campaign is a matter for the Bank. With regard to the issue of monetary policy credibility, as measured by public expectations of inflation, the following points should be noted:

—  the main way in which the MPC can entrench credibility is by establishing a good track record on inflation;

—  financial market expectations of inflation indicate the MPC's success in establishing credibility, as the report acknowledges.

(l) We do not think that at present it would be appropriate to change the level or measure of the inflation target (paragraph 32).

In his 2001 Budget speech the Chancellor announced that the inflation target will remain at 2½ per cent RPIX inflation. While the inflation target is set every year, the Chancellor believes that, at this stage, for reasons of consistency and stability it is best to maintain the 2½ per cent target.

(m) We agree that MPC members should be chosen as experts in monetary policy. However, we believe that there is an advantage in these experts coming from different backgrounds; and we note that one member of the MPC has a business background and another is a well known labour market economist (paragraph 33).

Consistent with the Bank of England Act 1998, external members of the MPC must have expertise or experience relevant to the Committee's functions. While the MPC is a committee of economic experts, not of representatives, the Government recognises that a diversity of experience is desirable.

(p) We repeat the recommendation made in our report on the accountability of the Bank of England that the duration of the terms of office of MPC members be increased (paragraph 37).

There is a balance to be struck between terms of appointment long enough for MPC members to develop familiarity with the Committee's procedures but not so long that high calibre candidates might be deterred from accepting appointment as an MPC member. The Government notes the Committee's recommendation but remains of the view that three­year terms, with the possibility of renewal, strike the right balance.

(q) We believe that the non­executive directors need to be much more proactive in ensuring that the procedures of the MPC operate fairly with respect to both internal and external members [of the MPC] (paragraph 40).

The Bank of England Act gives the subcommittee of the Court's nonexecutive directors responsibility for keeping the procedures followed by the MPC under review. It is required to report on them in the Bank's Annual Report. Ensuring the MPC operates fairly with respect to both internal and external members falls within non­executive directors' responsibilities under the Act. The Government is confident that the non­executive directors will ensure that the issue of fair treatment of all MPC members is kept under review.

The role of the Treasury Committee

(u) We still believe that confirmation hearings should be put on a statutory basis (paragraph 49).

The Government sees substantial difficulties with the Committee's proposal that confirmation hearings be put on a statutory basis. It raises important constitutional issues which go far wider than the Bank of England. It would therefore be more appropriate for Parliament to consider first the issue of official appointments and the role of Select Committees in general rather than to legislate for confirmatory hearings for the MPC in isolation.

(v) We think that confirmation hearings, even on a non­statutory basis, act as a stimulus to the Chancellor to choose candidates who are competent and independent. We also believe that our questionnaire and hearings provide essential information about the background of the appointees which is not otherwise readily available. Above all, the hearings underline the fact that MPC members are accountable to Parliament and to the public (paragraph 52).

The Government is committed to appointing top calibre candidates to the MPC, with appropriate expertise and independence.

(x) Any candidate who is worth a place on the MPC should have the expertise and ability to withstand responsible questioning from our Committee. If the prospect of a confirmation hearing puts the candidate off from applying then he or she is probably not suitable for the post in the first place (paragraphs 54 and 55).

The criteria for appointment to the MPC are clearly set out in the Bank of England Act 1998.

Wider policy issues

(y) We believe the responsibility is on us to continue to probe the advice which the Treasury gives the MPC by questioning the Chancellor and the Treasury representative (paragraph 59).

The Treasury sets the framework, but does not advise the MPC on its interest rate decisions. The Treasury representative provides the MPC with information on fiscal policy and on the Government's economic policies more generally. It is for the MPC to decide how to use the information it receives from the Treasury.

(z) The strength of sterling has had a disproportionately severe effect on the manufacturing sector of the UK economy, with many companies finding it difficult to remain competitive, particularly in European markets (paragraph 60).

The Government understands the difficulties that the strength of sterling has caused. Despite the exchange rate, manufacturing output grew 1.6 per cent in 2000 as a whole—the fastest annual growth rate since 1994.

Manufacturers are benefiting from the Government's policies for economic stability: economic growth has averaged 2.7 per cent since May 1997, long­term interest rates are around their lowest levels for 35 years and the UK is enjoying the longest period of sustained low inflation since the 1960s. As a recent CBI report noted: "The macro­economic policies pursued by the Government have succeeded in delivering a stable and favourable economic environment" (The Future of Manufacturing, December 2000).

(aa) We support the MPC's stance in how it accounts for exchange rate movements in its policy deliberations but we also question whether the MPC are learning from developments in the economy as quickly as they should. If they had changed their exchange rate forecast assumption earlier, it is possible that interest rates would have been cut earlier and inflation might not now be undershooting the target (paragraph 64).

The details of their forecasting assumptions and procedures for changing them are a matter for the MPC.

HM Treasury, May 2001


1   The Treasury add, in a covering note: "Those recommendations of the Committee which are not specifically addressed in the response have either been noted or are a matter for the Bank of England". For a full list of the Committee's conclusions and recommendations, see pp vii-ix. Back


 
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