By the Select Committee appointed to consider the
Monetary Policy Committee of the Bank of England
CHAPTER 1: INTRODUCTION
1. Since the Government gave the Bank of England
operational responsibility for setting interest rates in 1997,
the work of the Bank's Monetary Policy Committee (MPC) has become
an established feature of economic policy and of political debate.
Public interest in, and anticipation of, the monthly meetings
of the MPC and the announcements of its decisions on interest
rates continue to be high, and there is almost as much interest
when rates remain unchanged as when they move.
While there appears to be general agreement that the MPC has worked
well in the economic conditions which have recently been seen,
there is a case for probing the efficacy of its procedures to
ensure that they are sufficiently robust to stand the test of
more trying economic, or indeed political, conditions. There is
also a need for continuing vigilance at a time when complacency
could emerge, as everyone thinks everything is going smoothly.
In addition, there are those for whom further education in the
working of the MPC will continue to be of value.
2. We consider that this report will make a contribution
to the continuing debate about the work of the MPC. We also believe,
however, that, in line with the Government's commitment to more
open and accountable decision-making on monetary policy,
Parliament must remain significant in the new arrangements for
monetary policy. The members of the MPC are not, unlike the Chancellor
of the Exchequer when he used to set interest rates, directly
accountable to Parliament as ministers; nor are they directly
accountable to the electorate as members of the House of Commons.
There is accordingly a need for Parliament, and by Parliament
we mean both Houses, to ensure that procedures are put into place
to scrutinise and report on the work of the MPC. We include in
such scrutiny, scrutiny in the non-partisan atmosphere of the
House of Lords. Arguments about openness and scrutiny also, in
our view, apply just as strongly to fiscal policy not least because
of the need for co-ordination between monetary and fiscal policy,
on which we say more in paragraphs 19-23 below.
3. It is against this background that the House
of Lords agreed to appoint our committee for a second time. The
Committee members are listed in Appendix 1. Our previous report
came after an intensive period of evidence and deliberation during
early 1999. When we were appointed again
we decided to proceed on a similar basis, namely hearing evidence
from a wide range of those with a direct interest in the work
of the MPC, before reaching our conclusions. Our witnesses are
listed in Appendix 2. We are, as before, very grateful to all
our witnesses for the time and effort they have taken to come
and share with us the benefits of their experience. All our witnesses
attended voluntarily and willingly. Our conclusions are based
on the evidence that we have heard, which is published as Volume
II of this report but also summarised in the text. References
in the form (Q 00) or (p 00) are to questions or pages in Volume
4. We are also very grateful to Professor Mike
Wickens of the University of York for taking the time to assist
us during our inquiry, as he did during our previous inquiry.
We much benefited from his clear and thoughtful analysis of the
issues we have considered.
5. Looking ahead, the House of Lords has decided
to appoint a permanent sessional committee on economic affairs.
Now that we have made our report to the House, we expect that
this new committee will begin its work. Although the work of the
new committee will be much wider than ours, we consider that issues
around monetary policy and the role of the Bank of England will
remain of significance. We would therefore hope that the new committee
will, among its many other responsibilities, pay detailed attention
to these issues. In particular the new committee may wish to hold
annual meetings with the Governor and ministers to scrutinise
the continuing operation of monetary policy. During the course
of this report we also identify a number of wider issues on which
we heard evidence but on which we, as a committee with a limited
remit, do not feel able to take further evidence and to
come to firm conclusions or make appropriate recommendations.
We would hope that the new Economic Affairs Committee, when appointed,
would, in considering its programme of work, give detailed consideration
to these suggestions and carry at least some of them forward,
as well as tackling wider issues such as globalisation and debt
6. In examining the work of the MPC, we have
been very conscious of the work done by the House of Commons Treasury
Select Committee. That Committee has conducted direct scrutiny
of the work of the MPC but we consider that our report will complement,
rather than overlap with, theirs. This is because we have tried
to avoid duplicating their detailed consideration of specific
interest rate decisions and because we have not undertaken, as
the Commons Treasury Committee has done, confirmation hearings
of individuals appointed to the MPC,
nor would we wish to do so.
7. In this report we have also not covered issues
that we consider to have been thoroughly dealt with in our First
Report. These include a number of questions of general background,
which we did not see any need to repeat in this report. For example,
our previous report covered in some detail the story of the establishment
of the MPC; an account of the history of inflation and interest
rates, both in the United Kingdom and internationally; and an
analysis of the meaning of section 11 of the Bank of England Act
a section which includes much-discussed provisos on the MPC's
objectives. All these are matters which we hope our readers will
find fully covered in our previous report and for ease of reference,
the box on page 7 sets out our previous conclusions.
On the other hand, there have been a number of significant developments
since our First Report and we reflect these in this report. Of
particular note has been the maintenance of stable interest rates
for a considerable period.
8. This report takes the form of a number of
chapters, each dealing with a particular area of interest. As
we consider the evidence we received on each topic, we also draw
some general conclusions. Chapter 6 draws together our conclusions
and recommendations but we would hope that the more detailed analysis
and argument, and summary of evidence, in the earlier chapters
will inform readers' analysis of our conclusions.
|Recommendations from our First Report
1. The Government was right to give operational independence for monetary policy to the Bank of England, and to place it on a statutory basis (paragraph 7.3).
2. The Treasury and the Bank of England have a duty to monitor in detail the performance of the Monetary Policy Committee, and to publish their assessment of it (paragraph 7.2).
3. We agree that an inflation target of 2.5 per cent is appropriate at this time (paragraph 7.6).
4. There is a need for further clarification by the Treasury on the "subject to that" part of Section 11 of the Act (paragraph 7.7).
5. We are less than clear whether the decision procedure of the Monetary Policy Committee is more an art than a science. They must make their procedure clearer so as to aid public scrutiny, and re-examine this procedure in order to remove any possible bias (paragraphs 7.9 and 7.11).
6. Appointments of the independent members of the Monetary Policy Committee must be made in a more open fashion. Such appointments should be for five years and normally non-renewable (paragraphs 7.13 and 7.14).
7. More attention should be paid to the reasons for interest rate differential between our interest rate and that set by the European Central Bank (paragraph 7.10).
8. The Court needs to make full use of its powers with respect to the Monetary Policy Committee, and could play a more active role (paragraph 7.16).
9. The Office for National Statistics needs to play a more active role in dealing with all the problems that have emerged in connection with the measurement of inflation, and especially the role of the harmonised index of consumer prices (HICP) (paragraphs 7.177.20).
10. Clarification is required of the part that the external value of sterling plays in the transmission mechanism of monetary policy to the real economy (paragraphs 7.227.23).
Appendix 4 shows the movement of rates since the MPC began its
The 1997 Labour Party Manifesto stated "we will reform the
Bank of England to ensure that decision making on monetary policy
is more effective, open-accountable and free from short-term political
Referred to in this report as our First Report and published as
House of Lords Paper 96-I: Report from the Select Committee on
the Monetary Policy Committee of the Bank of England, Session
1998-99 (27th July 1999). Back
On 6th March 2000. The Committee was appointed as a one-year ad
hoc Committee and formally re-appointed on 12th December 2000
at the start of the current session. Back
We draw readers' attention to various reports of the House of
Commons Treasury Committee, including their report "The Monetary
Policy Committee of the Bank of England: Confirmation Hearing"
(7th Report from the Treasury Committee, Session 1999-2000, 23rd
May 2000, HC Paper 520); and "The Monetary Policy Committee
- Two years on" (8th Report from the Treasury Committee Session
1998-99, 20th July 1999, HC Paper 505). These reports follow the
Treasury Committee's Report "Bank of England: Operational
Accountability - one year on" which was produced on 15th
July 1998 (HC Paper 993 Session 1997-98). Back
1998 c 11. Back
The Government's response to our First Report, and a response
by the Bank of England, are published in Appendix 5. Back