Monetary Policy Committee

Monetary Policy Committee
Interest rates since the Committee's inception
Formation	May 1997
Purpose/focus	Determining monetary policy
Governor	Mervyn King
Parent organization	Bank of England
Staff	9
Website	Monetary Policy Committee

The Monetary Policy Committee (MPC) of the Bank of England is the body responsible for setting the official interest rate in the UK, along with monitoring and directing other aspects of monetary policy, such as quantitative easing. It comprises eight members, along with the Governor of the Bank (currently Mervyn King), and is responsible primarily for keeping the Consumer Price Index measure of inflation close to a target (currently 2%) set by government.

The MPC was established in May 1997, shortly after that year's General Election, and officially given operational responsibility for setting interest rates in the Bank of England Act 1998

The Committee was designed to add credibility to interest rate-setting decisions, being independent of political interference. Each member has one vote, for which they can expected to be held to account: full minutes of each meeting are published within two weeks, and members are regularly called before the Treasury Committee, as well as speaking to wider audiences at events during the year.

Purpose

The MPC are asked to keep the Consumer Price Index at 2%; it has recently been running at over 3.

The MPC is responsible for formulating the UK's monetary policy,^[1] typically by setting the rate at which it lends to banks, the Bank of England Base Rate (or BOEBR).^[2] As laid out, decisions are made with the primary aim of price stability, defined by the government's inflation target (currently 2% on the Consumer Price Index). The secondary aim is to support the government's economic policies, and help it meet targets for growth and employment.^[1] The MPC is not responsible for fiscal policy, which is handled by the Treasury itself,^[3] but is briefed by the Treasury about fiscal policy developments at meetings.^[2] A criticism of the MPC has been that it focuses too much on inflation, and too little on growth and employment.^[1] In recent years, there have also been complaints about the reluctance of lenders to pass on rate changes.^[4]

Under the Bank of England Act 1998 the Governor must write an open letter of explanation to the Chancellor of the Exchequer if inflation moves outside the range of 1-3%, and once every three months thereafter, until CPI is back within this range again. It should also set out what plans the Bank has for rectifying the problem in the meantime and how long it expects inflation to remain at those levels.^[1]

In January 2009 the Chancellor announced an Asset Purchase Facility (APF), to be administered by the MPC, to ensure greater liquidity in financial markets.^[5] The committee had already started to cut rates the previous autumn, but the effect of such changes can take up to two years; equally, rates could not go below zero. By March 2009, faced with very low levels on inflation and interest rates already at 0.5%, the MPC voted to start the process of quantitative easing–the injection of money directly into the economy–via the APF. It had the Bank buy government bonds (gilts), along with a smaller amount of high-quality debt issued by private companies.^[6] (As of August 2010, it holds these in a ratio of about 160 to 1 in favour of the gilts.^[7])

History

Traditionally, the Treasury set interest rates. After reforms in 1992, officials held regular meetings and published minutes, but were not independent of government,^[3] leading to a feeling that political factors were clouding what should be purely economic judgements on monetary policy.^[4]

On 6 May 1997, operational responsibility to set interest rates was granted to the independent Bank of England by the Chancellor of the Exchequer, Gordon Brown.^[4] Guidelines for the creation of a new "Monetary Policy Committee" were laid out in the Bank of England Act 1998. The Act also set out the responsibilities of the MPC: it would meet monthly; its membership comprise the Governor, two Deputy Governors, two of the Bank's Executive Directors and four members appointed by the Chancellor. It should publish minutes of all meetings within six weeks (in October 1998 the committee announced plans to publish far more quickly, after only one^[8]). The Act gave the government responsibility for specifying its price stability target and growth and employment objectives at least annually.^[9] The government reserved the right to instruct the Bank on what rate to set in times of emergency.^[10]

The years 1998 to 2006 witnessed an unprecedented period of price stability - during which inflation stayed within a percentage point of the target - despite earlier predictions that it could move outside the range forty or more percent of the time. A 2007 report produced for the Treasury Committee noted that the MPC's independence of government "has reduced the scope for short-term political considerations to enter into the determination of interest rates." The creation of the MPC, it said, brought with it "an immediate credibility gain".^[3]

The original inflation target for the MPC was 2.5% on the RPI-X measure of inflation, but in 2003 this was changed to 2% on CPI.^[3] Under the Bank of England Act, on 16 April 2007, The Governor, Mervyn King, was obliged to write the first MPC open letter to the Chancellor (then Gordon Brown), explaining why the inflation had deviated from the target of 2% and reached 3.1%.^[11] In November 2010 he wrote his ninth such letter, to new Chancellor George Osborne, three months after inflation crossed the 3% threshold.^[12]

In its first ten years, the MPC kept interest rates relatively stable between 3.5% and 7.5%. Between October 2008 and March the following year, however, base rate was cut six times to an all-time low of 0.5%. In March 2009, the MPC launched a programme of quantitative easing, initially injecting £75 billion into the economy.^[13] As of March 2010, it voted to keep rates at 0.5% and had increased the amount of money set aside for quantitative easing to £200 billion.^[14]

Composition

The Committee comprises:^[2]

• The Governor of the Bank
• The two Deputy Governors
• The Executive Director for Monetary Analysis and Statistics, the Bank's Chief Economist
• The Executive Director for Markets
• Four external members, appointed by the Chancellor of the Exchequer for a renewable three year term

Each member has one vote of equal weight,^[2] for which they can be held publicly accountable.^[3] The Governor chairs the meeting and is the last to cast his vote, acting as a casting vote in event of a tie.^[15] Representatives from the Treasury can attend the meeting, but only as non-voting observers.^[2]

Meetings

After a half-day "pre-MPC meeting", usually the Friday before, meetings are held over two days,^[2] typically on the Wednesday and Thursday following the first Monday of each month.^[16] This is sometimes deviated from, including in the event of general election; in 2010, for example, the meeting was postponed from the 5/6 to the 7/10 May in order to avoid conflicting with the election schedule for the 6th.^[16]

On the first day of each meeting, the Committee studies data relating to the UK economy, as well as the worldwide economy, presented by the Bank's economists and regional representatives, and topics for discussion are identified.^[2] On the second day, each member is asked their views about the direction of policy they would like to see. The Governor chooses the policy most likely to command a majority and a vote is then taken to confirm; each member gets one vote.^[2] The interest rate decisions are announced at noon of the second day of the meeting, following the conclusion of the meeting.^[15] Minutes of each meeting, which explain the reasons for the decision and list the votes of each member, are published on the Bank's website after a two-week delay. Those in the minority are asked to give the action they would have preferred.^[2]

Other than monthly meetings, members of the MPC can be called upon by parliament to answer questions regarding their decisions, via parliamentary committee meetings, often those of the Treasury Committee. MPC members also speak to audiences throughout the country, with the same aim. Their views and expectations for inflation are also republished in the Bank's quarterly inflation report.^[2]

Membership

To date, 24 men and 4 women have served on the MPC. The current Committee comprises (by status):^[17]

• Mervyn King (June 1997 – 30 June 2008, currently Governor)
• Charles Bean (October 2000 – 30 June 2013, currently Deputy Governor)
• Paul Tucker (June 2002 – 28 February 2014, currently Deputy Governor)
• Spencer Dale (1 July 2008 – 31 May 2013, currently Executive Director for Monetary Analysis and Statistics)
• Paul Fisher (1 March 2009 – 31 May 2011, currently Executive Director for Markets)
• Andrew Sentance (1 October 2006 – 31 May 2011, external member)
• David Miles (1 June 2009 – 31 May 2012, external member)
• Adam Posen (1 September 2009 – 31 August 2012, external member)
• Martin Weale (1 August 2010 – 31 July 2013, external member)

Other, former members of the Committee (by date of appointment) are:

• Sir Edward George (June 1997 – June 2003)
• Howard Davies (June – July 1997)
• Willem Buiter (June 1997 – May 2000)
• Charles Goodhart (June 1997 – May 2000)
• Ian Plenderleith (June 1997 – May 2002)
• David Clementi (September 1997 – August 2002)
• DeAnne Julius (September 1997 – May 2001)
• Sir Alan Budd (December 1997 – May 1999)
• Sir John Vickers (June 1998 – September 2000)
• Sushil Wadhwani (June 1999 – May 2002)
• Christopher Allsopp (June 2000 – May 2003)
• Stephen Nickell (June 2000 – 31 May 2006)
• Kate Barker (June 2001 – 31 May 2010)
• Marian Bell (June 2002 – June 2005)
• Sir Andrew Large (September 2002 – January 2006)
• Richard Lambert (June 2003 – March 2006)
• Rachel Lomax (1 July 2003 – 30 June 2008)
• David Walton (1 July 2005 – 21 June 2006)
• Sir John Gieve (16 January 2006 – March 2009)
• David Blanchflower (1 June 2006 – 31 May 2009)
• Tim Besley (1 September 2006 – 31 August 2009)

The dates listed show when their current terms of appointment are due to, or did, end.

As of January 2008, Mervyn King, the Bank of England's current Governor, is the only MPC member to have taken part in every meeting since 1997.^[18] As of 2007, Kate Barker is the only external member to date to have been appointed for three terms,^[19] but she is stepping down after July 2010.^[20]

See also

• Federal Open Market Committee, the equivalent structure in the United States' Federal Reserve System

References

1. ^ ^{a b c d} Parkin, Michael; Powell, Melanie; Matthews, Kent (13 December 2007). Economics. Addison-Wesley. pp. 642–44. ISBN 9780132041225. http://books.google.com/books?id=Kp6Ls7j3tVIC&pg=PA642. Retrieved 17 April 2010. 
2. ^ ^{a b c d e f g h i j} "Monetary Policy Committee". Bank of England. http://www.bankofengland.co.uk/monetarypolicy/overview.htm. Retrieved 17 April 2010. 
3. ^ ^{a b c d e} Bank of England (2007). "Treasury Committee Inquiry into the Monetary Policy Committee of the Bank of England: Ten Years On". The Stationery Office. http://www.bankofengland.co.uk/publications/other/treasurycommittee/mpc/tsc070219.pdf. Retrieved 17 April 2010. 
4. ^ ^{a b c} "Monetary Policy Committee". politics.co.uk. November 2008. http://www.politics.co.uk/briefings-guides/issue-briefs/economy-and-finance/monetary-policy-committee-$366554.htm. Retrieved 17 April 2010. 
5. ^ "Asset Purchase Facility". Bank of England. http://www.bankofengland.co.uk/monetarypolicy/qe/facility.htm. Retrieved 17 April 2010. 
6. ^ Quantitative Easing explained. Bank of Endland. ISBN 1 85730 114 5. http://www.bankofengland.co.uk/monetarypolicy/pdf/qe-pamphlet.pdf. Retrieved 17 April 2010. 
7. ^ "Asset Purchase Facility Results". Bank of England. 5 August 2010. http://www.bankofengland.co.uk/markets/apf/results.htm. Retrieved 12 August 2010. 
8. ^ "Monetary Policy Committee Minutes". Bank of England. http://www.bankofengland.co.uk/publications/minutes/mpc/index.htm. Retrieved 17 April 2010. 
9. ^ "Governance". Bank of England. http://www.bankofengland.co.uk/about/governance/index.htm. Retrieved 17 April 2010. 
10. ^ Keegan, William (2003). The prudence of Mr Gordon Brown. Wiley. ISBN 9780470846971. http://books.google.com/books?id=ODy5AAAAIAAJ. Retrieved 18 April 2010. 
11. ^ "Rate hike fear as inflation jumps". BBC News. 17 April 2007. http://news.bbc.co.uk/1/hi/business/6562723.stm. Retrieved 17 April 2010. 
12. ^ O'Grady, Sean (17 November 2010). "Bank urged to remain calm as inflation rises". Independent. http://www.independent.co.uk/news/business/news/bank-urged-to-remain-calm-as-inflation-rises-2136034.html. Retrieved 19 November 2010. 
13. ^ "UK interest rates lowered to 0.5%". BBC News. 5 March 2009. http://news.bbc.co.uk/1/hi/business/7925620.stm. Retrieved 18 April 2010. 
14. ^ "UK interest rates remain at record low". BBC News. 4 November 2010. http://www.bbc.co.uk/news/business-11694582. Retrieved 19 November 2010. 
15. ^ ^{a b} "Monetary Policy Committee Decisions". Bank of England. April 2010. http://www.bankofengland.co.uk/monetarypolicy/decisions.htm. Retrieved 17 April 2010. 
16. ^ ^{a b} "Monetary Policy Committee Dates for 2010 and Provisional Dates for 2011". Bank of England. 19 February 2010. http://www.bankofengland.co.uk/publications/news/2009/070.htm. Retrieved 17 April 2010. 
17. ^ "Members of the Monetary Policy Committee (MPC)". Bank of England. http://www.bankofengland.co.uk/monetarypolicy/members.htm. Retrieved 17 April 2010. 
18. ^ Litterick, David (31 January 2008). "Mervyn King faces a rocky road to stability". The Telegraph. http://www.telegraph.co.uk/finance/economics/2783652/Mervyn-King-faces-a-rocky-road-to-stability.html. Retrieved 17 April 2010. 
19. ^ House of Commons Treasury Committee (22 August 2007). The Monetary Policy Committee of the Bank of England: re-appointment hearing for Ms Kate Barker and Mr Charlie Bean (volume 2). The Stationery Office. ISBN 9780215036070. http://books.google.com/books?id=bX9KUZYquPMC. Retrieved 17 April 2010. 
20. ^ "Chancellor appoints Dr Martin Weale as external member of the Monetary Policy Committee". HM Treasury. 5 July 2010. http://www.hm-treasury.gov.uk/press_21_10.htm. Retrieved 5 July 2010. 

External links

• Official homepage of the MPC
• Spreadsheet showing MPC votes since 1997
• Monetary Policy Committee Minutes
• A comparison of the MPC and its counterparts in other countries
• Bank of England Act 1998 (full text)