An independent Bank of England
the Monetary Policy Committee (MPC)
MPC meetings
explaining the MPC's views and decisions
The Chancellor's remit for the MPC
In 1997, as well as modifying the inflation target, the new Government gave the Bank of England independence to set interest rates. This was a major change in the policy framework. It meant interest rates would no longer be set by politicians. The Bank would act independently of Government, though the inflation target would be set by the Chancellor. The Bank would be accountable to parliament and the wider public.
The objective given to the Bank of England was initially explained in a letter from the Chancellor. This objective was then formalised in the 1998 Bank of England Act. The Bank has "to maintain price stability, and, subject to that, to support the economic policy of HM Government including its objectives for growth and employment" (Bank of England Act 1998).
The Bank's remit recognises the role of price stability in achieving economic stability more generally, and in enabling sustainable growth in output and employment. It also recognises that the inflation target will not be achieved all the time and that, confronted with unexpected developments in the economy, striving to meet the target in all circumstances might cause undesirable volatility of output.
The Chancellor restates the inflation target each year. From
June 1997 to December 2003, the target was 2.5% for RPIX inflation.
The Chancellor, on 10 December 2003 changed the target to 2.0%
for CPI inflation. The most recent policy statement
is available at the end of this section.
Dear Chancellor
If the inflation target is missed by more than 1 percentage point on either side - in other words, if the annual rate of CPI inflation is more than 3.0% or less than 1.0% - the Governor of the Bank, as Chairman of the MPC, must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target. This does not mean that the Bank has a target of 1.0 - 3.0%. The target is 2.0%. But if inflation varies by more than 1.0 percentage point from the target, the Bank has to explain why.
So far this has not happened. But it is probable that at some point the annual rate of inflation will be more than 1 percentage point from the target. This is because, from time to time, the economy will face unexpected changes and be influenced by unforeseen events.
the Monetary Policy Committee 
The Chancellor instructed the Bank to create a new committee to set interest rates - the Monetary Policy Committee (MPC). The Committee consists of nine independent members - five from the Bank of England and four external members appointed by the Chancellor. The appointment of external members to the Committee is meant to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.
Members serve fixed terms after which they may be replaced
or re-appointed. The current members are:
Mervyn King, Governor
Charles Bean, Deputy Governor
Sir John Gieve, Deputy Governor
Kate Barker
Tim Besley
David Blanchflower
Spencer Dale
Andrew Sentance
Paul Tucker
Each member of the MPC has expertise in the field of economics and monetary policy. Members do not represent individual groups or areas. They are independent. Each member of the Committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target. The MPC's decision is not a consensus of opinion. It reflects the votes of each individual member of the Committee.
A representative from the Treasury also sits with the Committee at its meetings. The Treasury representative can discuss policy issues but is not allowed to vote. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government's economic policies, and that the Chancellor is kept fully informed about monetary policy.
MPC meetings
The MPC meets every month to set the interest rate. Throughout the month, the MPC receives extensive briefing on the economy from Bank of England staff. This includes a half-day meeting - known as the pre-MPC meeting - which usually takes place on the Friday before the MPC's interest rate setting meeting. The nine members of the Committee are made aware of all the latest data on the economy and hear explanations of recent trends and analysis of important issues. The Committee is also told about business conditions around the country from the Bank's regionally-based Agents. The Agents' role is to talk directly to business to gain intelligence and insight into current and future economic developments and prospects.
two days - one decision
The monthly MPC meeting itself is a two-day affair. On the first day, the meeting starts with an update on the most recent economic data. A series of issues is then identified for discussion. On the following day, the Governor summarises the previous day's discussions and the MPC members individually explain their views on what policy should be. The Governor then puts to the meeting the policy which he believes will command a majority and the Committee takes a vote. Any member in a minority is asked to say what level of interest rates he or she would have preferred, and this is recorded in the minutes of the meeting. The interest rate decision is announced at 12 noon on the second day.
explaining the MPC's views and decisions - public accountability
The MPC goes to great lengths to explain its thinking and decisions. The minutes of the MPC meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. The Committee has to explain its actions regularly to parliamentary committees, particularly the Treasury Committee. MPC members also speak to audiences throughout the country, explaining the MPC's policy decisions and thinking. This is a two-way dialogue. Regional visits also give members of the MPC a chance to gather first-hand intelligence about the economic situation from businesses and other organisations.
In addition to the monthly MPC minutes, the Bank publishes
its Inflation Report every quarter. This report gives
an analysis of the UK economy and the factors influencing policy
decisions. The Inflation Report also includes the MPC's
latest forecasts for inflation and output growth. Because monetary
policy operates with a time lag of about two years, it is necessary
for the MPC to form judgements about the outlook for output
and inflation. The MPC uses a model of the economy to help
produce its projections. The model provides a framework to
organise thinking on how the economy works and how different
economic developments might affect future inflation. But this
is not a mechanical exercise - forecasts are not produced by
feeding data into the model and pressing a computer button
to get the answer. Given all the uncertainties and unknowns
of the future, the MPC's forecast has to involve a great deal
of judgement about the economy. There are no crystal balls to
tell the Committee what the future will be.
We tell you more about the MPC's projections for growth
and inflation in 'Inflation Outlook' under the heading 'The
MPC's growth and Inflation forecasts - judgement and uncertainty'.
We do not want teams to produce forecasts and you do not
need to understand how the MPC produces its projections.
But we will tell you something about the factors that might
affect inflation in one or two years' time - so teams can
form their own opinions and make their own judgements.
The Bank of England is charged with the task of meeting the Government's inflation target, which is now 2.0% based on the CPI measure of inflation. The target is symmetrical - inflation below or above the target is viewed as equally undesirable. Inflation will not always be 2.0%. The aim is that it is 2.0% on average over time. The independent nine-member Monetary Policy Committee sets the interest rate each month at a level it believes is consistent with achieving the inflation target.
Key Resources
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