|Interest rates are set by the Bank’s Monetary Policy Committee. The MPC sets an interest rate it judges will enable the inflation target to be met. The Bank's Monetary Policy Committee (MPC) is made up of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets & Banking, the Bank's Chief Economist and four external members appointed directly by the Chancellor. The appointment of independent members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.
The Monetary Policy Committee members.
Members serve fixed terms after which they may be replaced or re-appointed.
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 made on the basis of one-person, one vote. It is not based on 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.
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 the week 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 relevant issues. The Committee is also told about business conditions around the UK from the Bank's Agents. The Agents' role is to talk directly to business to gain intelligence and insight into current and future economic developments and prospects.
The MPC meets over three days. At the first meeting, normally held on the Thursday prior to the MPC decision, members discuss their views on how to interpret the most recent economic data. At the MPC’s second meeting – the first of two policy meetings, normally held the following Monday – MPC members debate what the appropriate stance of policy should be.
The MPC’s final meeting – its second policy meeting – is normally held on the Wednesday. Following further discussion on the appropriate stance of monetary policy, the Governor puts to the meeting the policy which he believes will command a majority and members of the MPC vote. Any member in a minority is asked to say what level of interest rates he or she would have preferred. The interest rate decision is published alongside the minutes of the MPC’s meetings at 12 noon on the Thursday.
The Warsh Review, led by former Federal Reserve Governor Kevin Warsh, recommended in December 2014 that the MPC should in future meet on eight occasions through the year. The Government has announced its intention to implement these changes as the part of the Bank of England Bill, which will be considered by Parliament in due course.
Public accountability: explaining views and decisions
The MPC is committed to the greatest possible degree of transparency around its decision-making. The minutes of the MPC meetings are published simultaneously with the interest rate decision. They also record the votes of the individual members of the Committee. The minutes give a full account of the policy discussion, including differences of view. As recommended by the Warsh Review, beginning from [March 2015] transcripts of the MPC’s policy meetings be published with an eight-year lag.
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 judgments 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. Given all the uncertainties and unknowns of the future, the MPC's forecast has to involve a great deal of judgment about the economy.
Beyond its own publications, MPC members regularly appears before Parliament – most commonly the House of Commons Treasury Select Committee – to explain its actions. MPC members also give regular speeches media interviews to explain the MPC's policy decisions and thinking to the widest possible audience.
All members conduct a series of regional visits throughout the UK to engage in discussion with individuals and businesses on issues affecting their economic lives. This is a two-way dialogue, which gives members valuable first-hand intelligence about the economic situation as experienced over the length and breadth of the country.