17 February 2012 Joe Grice Chief Economist ONS and Executive Director Economic, Labour Market and Social Analysis Directorate Office for National Statistics Cardiff Road Newport South Wales NP10 8XG Dear Joe ONS performance and priorities: 2011/12 review In accordance with the Service Level Agreement between the Bank and the ONS, this letter discusses the Bank’s view of the performance of the ONS in 2011/12 and its priorities for economic and financial statistics over the coming years. This reflects discussion with members of the Monetary Policy Committee. In light of the creation of the Financial Policy Committee, we also note some priorities in developing financial statistics. The attached pro forma provides detailed feedback from the Bank. The following text is a brief summary of the Bank’s views on performance, together with its key priorities. Performance The Bank places a high value on timely, accurate economic data; we appreciate the ONS’ expertise and efforts to deliver this. We continue to place importance on the working relationship with ONS staff and welcome engagement on Bank priorities. The 2011 Blue Book included significant changes, including the move to SIC2007, and is clearly a step forward. We welcomed the production of 2005 Input Output tables. The Blue Book - stated as a key priority last year - fell short of expectations, however, due to significant publication delays and gaps in backdata. That placed a significant cost on Bank staff. The consistency of long-run datasets remains a concern; in particular, GDP has been deflated using the new methodology only from 1997. We remain pleased with ONS performance on prices and labour market, and support provided to the Bank in understanding these statistics. CPI data production has continued to go smoothly and we remain confident in the overall data quality. We welcome the further progress made in 2011 towards incorporating Owner Occupied Housing into the CPI. 2 From a financial stability perspective, we appreciated the establishment of an Expert Group on developing financial statistics. We welcome ONS plans to improve the flow of funds reporting in line with the prioritised data gaps identified following the financial crisis. Given the National Accounts’ particular importance to us, this year’s Blue Book problems have weighed heavily on the Bank’s overall assessment. This was compounded by a number of errors in data releases and issues around the launch of the new website. We therefore judge that performance has been poor, in that performance needs noticeable improvement in this area. If that area is put to one side, performance in the remaining areas is judged satisfactory. Priorities For the year ahead, from a monetary policy perspective we judge that the key priorities are: consolidating the changes to the Blue Book, especially in terms of producing consistent backruns of key series and, in particular, GDP; and further progress on the incorporation of owner-occupied housing into the CPI. On the latter, last year we encouraged the ONS to improve the rental equivalence measure further: we are very pleased with the recent work on this measure, and are strongly supportive of the further work being done to present a final version at the April CPAC meeting. On the financial stability side, the key priority is providing a well-grounded sectoral disaggregation of the flow of funds, which appears to us to be the part of the National Accounts most in need of improvement following the financial crisis, as identified in recent years. The Bank executive use such data as part of their briefing to the FPC on the risks to financial stability, so we need to be assured that the right degree of commitment is being given to the quality and scope of these data. We stated this as key priority for the Bank last year, and we are pleased that the ONS is beginning work on this area and is considering options that meet the requirements of the European System of Accounts 2010, and the recent G20 initiative. We are, however, concerned that the ONS is currently favouring a model-based approach that does not materially improve on the status quo rather than a fuller approach, including new surveys and data systems, that would be a considerable step forward. We consider that, in order to meet the spirit of the ESA 2010 reform and the G20 initiative to which the United Kingdom has signed up, as well as the importance of these data for our assessment of Financial Stability, the ONS would need to pursue the most complete of the options put forward to the Bank. Finally, on behalf of both the MPC and the Bank’s staff, we would like to thank you and your colleagues once again for your invaluable help and support over the past year and your readiness to respond to our questions. The issues raised above reflect the importance that the Bank attaches to ONS data. ONS staff have continued to provide us with assistance that has been crucial in helping the Bank to deliver against its core purposes. That help is very much appreciated. We are copying this letter to at HM Treasury and Sir Michael Scholar KCB at the UK Statistics Authority. Yours sincerely Bank of England, Threadneedle Street, London EC2R 8AH; S/B +44 (0)207 601 4444; www.bankofengland.co.uk .