House of Commons Treasury The Monetary Policy Committee of the Bank of England: ten years on Twelfth Report of Session 2006–07 Volume I Report, together with formal minutes, oral and written evidence Ordered by The House of Commons to be printed 24 July 2007 HC 299–I Published on 18 September 2007 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue & Customs and associated public bodies. Current membership Rt Hon John McFall MP (Labour, West Dunbartonshire) (Chairman) Mr Graham Brady MP (Conservative, Altrincham and Sale West) Mr Colin Breed MP (Liberal Democrat, South East Cornwall) Jim Cousins MP (Labour, Newcastle upon Tyne Central) Mr Philip Dunne (Conservative, Ludlow) Angela Eagle MP (Labour, Wallasey) Mr Michael Fallon MP (Conservative, Sevenoaks) (Chairman, Sub-Committee) Ms Sally Keeble MP (Labour, Northampton North) Mr Andrew Love MP (Labour, Edmonton) Mr George Mudie MP (Labour, Leeds East) Mr Siôn Simon MP, (Labour, Birmingham, Erdington) John Thurso MP (Liberal Democrat, Caithness, Sutherland and Easter Ross) Mr Mark Todd MP (Labour, South Derbyshire) Peter Viggers MP (Conservative, Gosport) The following members were also members of the Committee during the inquiry: Mr David Gauke MP (Conservative, South West Hertfordshire), Kerry McCarthy MP (Labour, Bristol East), and Mr Brooks Newmark MP (Conservative, Braintree). Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No. 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/parliamentary_committees/treasury_committee/treasury_co mmittee_reports.cfm. A list of Reports of the Committee in the last Parliament is at the back of this volume. Committee staff The current staff of the Committee are Colin Lee (Clerk), Fiona McLean (Second Clerk and Clerk of the Sub-Committee), Adam Wales, Jon Young, Harry Marin and Anna Leach (Committee Specialists), Lis McCracken (Committee Assistant), Michelle Edney (Secretary), Tes Stranger (Senior Office Clerk) and Laura Humble (Media Officer). Contacts All correspondence should be addressed to the Clerks of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5769; the Committee’s email address is [email protected] The Monetary Policy Committee of the Bank of England: ten years on 1 Contents Report Page Summary 3 1 Introduction 5 Building on success 5 The conduct of our inquiry 5 2 Reform of the monetary policy framework 7 Recent history 7 The need for further legislative reform 7 3 The economic context 9 Introduction 9 The past decade 9 Risks ahead 10 Asset prices 12 “Leaning against the wind” 12 The housing market 14 Household debt 15 Monetary aggregates 17 Inflation expectations 18 4 The monetary policy framework 19 Mandate 19 Setting the target 20 Target symmetry 21 Measuring inflation 22 Wage bargaining and the CPI 22 Including housing costs in the CPI 22 Monetary policy and fiscal policy 24 Coordination of monetary and fiscal policy 24 Allocating temporary fiscal powers to the Bank of England 25 5 The Monetary Policy Committee as a body 27 Size and balance of the MPC 27 Profile of external members 28 General requirements 28 Understanding economic models 29 Conclusions 30 Terms and conditions of ‘external’ members 30 Appointments 33 Introduction 33 Appointments of ‘external’ MPC members 33 The role of the Treasury Committee 36 Appointments of ‘internal’ MPC members 38 2 The Monetary Policy Committee of the Bank of England: ten years on Frequency of MPC meetings 38 The role of the Court of the Bank of England 39 Resources 41 Overall resources 41 Resources available to external MPC members 42 6 The transparency of the Monetary Policy Committee 44 Inflation expectations and educating the public 44 Writing letters 45 Future path of interest rates 47 Transparency after the vote 48 Dealings with professional economists 50 Transparency of the views of individual MPC members 50 Introduction 50 Minutes 50 Statements to the Treasury Committee 51 Attendance at Inflation Report press conferences 53 Our Inflation Report hearings 53 7 Conclusion 55 Conclusions and recommendations 56 Formal minutes 62 Witnesses 64 List of written evidence 65 The Monetary Policy Committee of the Bank of England: ten years on 3 Summary The contribution of the Monetary Policy Committee of the Bank of England over the last ten years to the goal of maintaining a low inflation environment in the UK has been significant. The monetary policy framework has also been broadly successful, and part of this success can be attributed to the Bank of England Act 1998. The evidence we have received suggests that the economic environment in which the MPC operates in future might not be as benign as in the last decade. We are concerned, therefore, at the lack of understanding of monetary policy by the general public, especially given this potential for a less benign economic environment ahead. We do not recommend changes to the mandate of the MPC, nor to the policy instruments it has at its disposal. We support the symmetrical nature of the current inflation target. We are content with the current size of the MPC. We recommend a single term for ‘external’ members of the MPC of up to six years, with no reappointment. We welcome the Government’s changes to the appointments process. We recommend, to prevent delays in appointing ‘external’ MPC members, the creation of a confidential pool of candidates that can be drawn from at short notice. We also argue that the positions of the Governor and of the two Deputy Governors should be recruited by open advertisement as well as confidential search. We recommend changes to enhance the transparency of the MPC, including immediate publication of a record of the votes of each MPC member after MPC decisions are released, greater transparency of individual MPC members’ positions in the minutes of the MPC, and further work on improving the public’s understanding of monetary policy. The Monetary Policy Committee of the Bank of England: ten years on 5 1 Introduction Building on success 1. The last decade has seen a period of sustained low inflation unparalleled in the history of post-war Britain. A target for inflation has been set and inflation has remained remarkably close to that target. The conduct of monetary policy has become the responsibility of the Monetary Policy Committee (MPC) of the Bank of England, which has discharged its responsibilities with a high degree of success. In this Report, we examine the reasons for that success, but we also look at ways to build on that success. We make recommendations designed to strengthen further the monetary policy framework to help to ensure that that framework is fully prepared to operate and retain high levels of parliamentary and public support in less benign economic conditions than those that have prevailed in recent years. The conduct of our inquiry 2. We undertake regular scrutiny of the MPC’s work, both through our sessions with members of the MPC about Inflation Reports and through the appointment hearings which we hold with appointees to the MPC. As the tenth anniversary of the establishment of the MPC drew near, we felt it was appropriate to undertake a fuller inquiry. We announced our decision to undertake an inquiry into the Monetary Policy Committee of the Bank of England: ten years on in November 2006, inviting written evidence by 24 January 2007 on four main themes, relating to the economic context, the monetary policy framework, the MPC as a body and the mechanics of setting and implementing monetary policy.1 In February 2007 we published all of the written evidence received in order to inform subsequent exchanges in oral evidence.2 We held five evidence sessions between March and June 2007, taking evidence from academic and City economists,3 from representatives of the CBI,4 the TUC,5 and the Court of the Bank of England,6 from Lord George, who served as Governor of the Bank of England from 1993 to 2003, from four former ‘external’ members of the MPC,7 from the current Governor of the Bank of England, Mr Mervyn King, and all eight other current members of the MPC,8 and from the then Chancellor of the Exchequer, the Rt. Hon. Gordon Brown MP. We also benefited greatly from visits to the Bank of Canada in Ottawa and the Federal Reserve Board in 1 See Treasury Committee press notice No. 3 of Session 2006–07, available at http://www.parliament.uk/parliamentary_committees/treasury_committee/tc211106pn03.cfm 2 Treasury Committee, Written Evidence, HC (2006–07) 299–II. All references to Ev 1 to Ev 103 are to memoranda included in that volume. 3 Professor Anton Muscatelli, Heriot-Watt University, Professor Simon Wren-Lewis, Merton College, Oxford University, Mr Ray Barrell, National Institute of Economic and Social Research, Professor Tim Congdon CBE, Mr Laurence Sanders, Bank of Ireland, Mr Michael Saunders, Citigroup, and Professor Jagjit Chadha, BNP Paribas 4 Mr Richard Lambert, Director General, and Mr Ian McCafferty, Chief Economic Adviser 5 Mr Brendan Barber, General Secretary, and Mr