Select Committee on Treasury Second Special Report


RESPONSE BY THE BANK OF ENGLAND TO REPORT OF THE TREASURY COMMITTEE "THE MONETARY POLICY COMMITTEE—AN END OF TERM REPORT"

The Monetary Policy Committee welcomes the Treasury Committee Report on its activities to date. The conclusions and recommendations of the Treasury Committee Report are divided into four sections. Our responses to those conclusions are as follows.

1  Assessing the performance of the Monetary Policy Committee [conclusions (a)-(e)][2]

The conclusions under this heading are broadly supportive of the performance of the Monetary Policy Committee. In response to conclusion (c) the MPC reiterates that it regards the inflation target as symmetric.

2  Assessing the monetary framework [conclusions (f)-(q)]

In this section too, the Treasury Committee Report is generally supportive of the MPC. In response to (h) we agree on the importance of informing the public of the policy objectives and our policy action and the work of the Bank in building a constituency for low inflation will certainly continue. In this context we will continue to consider possible new initiatives, and would draw the attention of the Treasury Committee to the highly successful competition for schools which was organised over the past year. In response to (i) the MPC keeps both the forecast process and the Inflation Report under constant review. It is aware of the difficulties of explaining the decisions of the Committee, but agrees with Mr Kohn that there is no simple solution in this area.

In response to (k), the Committee agrees that the HICP is a useful indicator of inflationary pressures in the UK and will comment on it as appropriate in the Inflation Report.

In response to (o) the MPC does not believe that holding its meeting outside London would be sensible. The most important benefit in holding meetings outside London is to be able to meet local people and businesses. That would be impossible around the time of a MPC meeting when all members of the Committee are in purdah. Hence it is important that the MPC finds other means to hold meetings, both individually and collectively, outside London. Many such meetings are already attended by individual members of the MPC as the Treasury Committee recognise. Collectively, most members of the MPC also attend the meetings of Court which are held outside London once a year.

3  The role of the Treasury Committee [conclusions (r)-(x)]

Most of the conclusions under this heading are addressed to either the Treasury or your own successor committee. The MPC is not opposed to confirmation hearings on the basis of responsible questioning related to the competence and independence of MPC members.

4  Wider policy issues [conclusions (y)-(bb)]

In response to (z) and (aa) the MPC would note that the significant movement in the exchange rate in recent years was much larger than any reasonable forecasting method would have produced. It is inherently difficult to make accurate forecasts of asset prices, whether for exchange rates, equities or other financial assets, but the Committee will continue to do its best in this area. In any event, what is important is that the Committee takes into account changes in those prices as they occur and remains ready to react to them if necessary.

In response to (bb) the Bank staff are undertaking an extensive programme of research on the "new economy". Whilst the concept of a "new economy" covers a number of issues, staff at the Bank are working on most of them.

In conclusion, the MPC would like to recognise the importance to its accountability, and to the monetary process as a whole, of the work of the Treasury Committee. The public explanation of how monetary policy is set and scrutiny of the views of MPC members represent an important component of both the transparency and accountability of monetary policy in the UK.

Supplementary Response by Court

In response to (q) the Bank notes that the issue relating to the level of dedicated support to be provided to external members of the MPC was in the process of resolution with the active involvement of NEDCO at the time that newspaper reports of a disagreement appeared.

9 May 2001




As not all the conclusions and recommendations referred to in the Bank's reply are set out in full in the Government's reply, a complete list follows for ease of reference:


Assessing the performance of the Monetary Policy Committee
  
(a)We note that since their inception the MPC have been working in a relatively benign economic environment; however, we also recognise that they have played a part in helping achieve these conditions (paragraph 6).
  
(b)Given the volatility of inflation in the UK over the last 25 years, the MPC's record, as measured by their performance against target, is impressive (paragraph 7).
  
(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 per cent if there is a balance of risks on the downside as we had been on the upside." (paragraph 12).
  
(d)We note that the MPC has performed well in meeting its secondary objectives of supporting the Government's policies for growth and employment (paragraph 15).
  
(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).
  
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).
  
(g)We do not see the need for individually attributable explanatory paragraphs in the MPC minutes. We believe that differences of view between MPC members, and their wider thinking, can be explained in public, including in our evidence sessions (paragraph 21).
  
(h)We commend the Bank on the way in which it has sought to disseminate information on the policy and actions of the monetary policy committee. However, as we noted in paragraph 10, 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).
  
(i)We agree with Mr Kohn that "the inflation forecast and Inflation Report are key elements in making policy under the inflation target set by the government and in explaining the policy to the public." We also note Mr Kohn's point that "the forecast round and Inflation Report may not be as helpful as they might be". We recommend the MPC review the current arrangements (paragraph 27).
  
(j)We recognise that there are a number of theoretical criticisms of the MPC's forecast assumption of unchanged interest rates. However we think that it provides the most easily understood framework for assessing future policy developments (paragraph 30).
  
(k)We would like to see more commentary in the Inflation Report on UK inflation as measured by the Harmonised Index of Consumer Prices (paragraph 31).
  
(l)We do not think that at present it would be appropriate to change the level or measure of the inflation target (paragraph 32).
  
(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).
  
(n)We welcome the consideration the MPC give to reports from the regional agents and emphasise their importance (paragraph 34).
  
(o)We recommend that the MPC should reconsider its decision not to hold meetings outside London, as we think the symbolic benefits would more than compensate the logistical inconveniences involved (paragraph 35).
  
(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).
  
(q)We believe that the Non-Executive Directors need to be much more pro-active in ensuring that the procedures of the MPC operate fairly with respect to both internal and external members (paragraph 40).
  
The role of the Treasury Committee
  
(r)We accept that individual questioning is very important for accountability and we recommend that our successor Committee ensures that over the course of a year each MPC member is called to account in this way (paragraph 45).
  
(s)We agree it is important that the Treasury Committee is adequately staffed and that the House provide sufficient resources to enable us to continue to recruit and retain suitably high calibre specialists (paragraph 46).
  
(t)We recommend that our successor committee continue to consider whether further explanatory work by the Bank on the monetary framework would be beneficial to Parliament and the general public (paragraph 48).
  
(u)We still believe that confirmation hearings should be put on a statutory basis (paragraph 49).
  
(v)We think that confirmation hearings, even on a non-statutory 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).
  
(w)We think it is vitally important that MPC members are able to express themselves well in public and withstand robust questioning, as they will undoubtedly face this both from within the MPC and from the general public (paragraph 54).
  
(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).
  
Wider policy issues
  
(y)We believe that 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).
  
(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).
  
(aa)We support the MPC's stance on 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).
  
(bb)We believe that the "new economy" and its developments are one of the key issues facing economic policy makers over the next few years and we expect the Bank to monitor the issue carefully. Our successor Committee may wish to pursue this issue further in the next Parliament (paragraph 67).



2   For the text of the recommendations, see pp vii-ix. Back


 
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