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


123.  This Chapter draws together our recommendations from the earlier chapters of the Report. For ease of reference, recommendations on related topics are grouped rather than following the sequence of paragraphs in the report, but a cross reference is given in each case.

Inflation Control

124.  The Chancellor should for the moment retain the current central inflation objective of 2.5 per cent. We support the symmetric inflation target but note that, in practice, inflation has more often been below the target than above it. Given that symmetry is important, and also that the aim is to hit the target, we accordingly recommend further investigation of why the outcome appears to show a downwards bias. We also recommend that, given the repeated instances of inflation below the target, the Chancellor gives consideration to setting the target at a lower level, and that he reports his conclusions to both Houses of Parliament (paragraphs 18 and 45).

125.  We note that that keeping strict control over inflation at all times is likely to create a short-term trade-off between output and inflation because there is always a decision to be taken on how quickly inflation should be brought back to its target level. We also note therefore that, if it takes time for interest rates to affect inflation, any letter to the Chancellor when inflation is more than one per cent away from the target might be better sent in anticipation of a breach of the limits, instead of after the event (paragraph 52).

126.  The evidence we have received appears to indicate that supply shocks would be treated in the same way as demand shocks, but we are not convinced that this would necessarily be appropriate. This is one area where, to date, the environment has not been too difficult for the MPC, especially when compared with the severe problems of the past. The current approach might be sorely tested in less favourable situations (paragraph 84).

127.  We are surprised that the Chancellor and the Governor do not discuss the balance between fiscal and monetary policy. The two-way provision of information must be maintained to ensure effective co-ordination (paragraphs 21 and 23). There is also as strong an argument for openness in and scrutiny of fiscal policy as there is for monetary policy (paragraph 2).

Measuring inflation

128.  Even if a change from RPIX as the basis for measuring inflation was warranted on technical grounds, there remains a strong argument for not making a change at this stage. We agree with the CBI that even if the MPC could devise a monetary conditions index that allowed them to achieve greater stability in the real economy without upsetting the primary objective of consumer price stability, the primary objective of policy should remain as is, for the reasons of clarity, credibility and public understanding (paragraphs 58 and 61).

Appointments to the MPC

129.  In the interests of greater transparency in the appointment process, we recommend that the Treasury makes known the existence of vacancies in the MPC so that people can put themselves forward and that the Treasury publicises from time to time the fact that nominations are always welcome (paragraph 105).

130.  We would be concerned were the outside members of the MPC to be drawn only from academic monetary economists and therefore give rise to little more than a technical committee of experts. We hope that the Chancellor and his successors will continue to share this view when making appointments to the MPC (paragraph 118).

131.  We stand by our previous recommendations that appointments to the MPC should be for a five-year term with very rare renewal and that not all the external members should be full-time appointments (paragraphs 109 and110).

132.  We note the continuation of non-statutory confirmation hearings by the Commons Treasury Committee. We do not propose that the new Economic Affairs Committee should undertake such confirmation hearings. We do call on the Chancellor, however, to report to Parliament on the merits and implications of involving the Commissioner for Public Appointments in prior scrutiny of MPC members (paragraph 122).

The working of the MPC

133.  We recommend that the Bank considers alternatives to the current procedure for preparing the forecast, even if only to satisfy everyone that procedures will indeed be sufficiently robust in a harsher economic climate. We also recommend a review of the method of forecasting inflation used by the MPC, with a view to discerning whether it is state-of-the-art. This review (in effect an audit) should be sponsored and financed by the Court, although they themselves would not be the body which undertook it (paragraphs 94 and 89).

134.  We remain to be convinced that the process of voting in the MPC 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 (paragraph 24).

The MPC Minutes

135.  We commend the MPC for the prompt publication of the monthly Minutes. We recommend that any MPC member wishing to offer in the Minutes a short paragraph by way of explaining their vote should be encouraged to do so (paragraphs 25 and 34).

136.  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 (paragraph 37).

The Media

137.  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 (paragraph 38).

Recommendations for the new Economic Affairs Committee

138.  The proposed new House of Lords Economic Affairs Committee could in due course undertake the study, recommended above, of why inflation has more often been below the target than above it. Such investigation could also examine in detail:

·  why the MPC has been so successful in keeping inflation down;

·  whether there are lessons to be learned in case economic conditions change for the worse in the future;

·  whether there are any issues of significance arising from the transmission mechanism;

·  how the MPC takes account of the Government's wider economic policy (including whether the "subject to that" proviso in section 11 of the Act in fact has any significance)(paragraph 45);

·  general issues arising in forecasting (paragraph 94).

139.  We also recommend that new Economic Affairs Committee gives careful consideration to the Kohn Report, assuming that the Committee decides to explore monetary policy issues with the Governor, the Chancellor and others, from time to time over the coming years (paragraph 40).

140.  The question of how the behaviour of the economy will change after the general election, should a party committed to a referendum on joining the euro win, will be a significant one for the new Committee to consider over the coming years. We note the possibility of serious effects should the markets begin to anticipate that the United Kingdom will join the euro (paragraph 49).

141.  The new Economic Affairs Committee could conduct a thorough review of the importance of regional variations in the economy and of the steps necessary to take account of them in the formulation of policy across the board (paragraph 90). Other general issues for investigation could include globalisation and debt management (paragraph 5).

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