The Monetary Policy Committee, MPC, is made up of nine members – the Governor, Sir Mervyn King; the two Deputy Governors; the Bank’s Chief Economist; the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.
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 relevant issues. The Committee also hears about business conditions around the UK from the Bank’s Agents. The Agents’ talk directly to business, to gain insight into current and future economic developments and prospects.
Whilst the MPC members each have expertise in the field of economics and monetary policy, each does not represent an individual group or finance area – they are required to be 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 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, a summary of the previous day’s discussion is provided 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 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, and this is recorded in the minutes of the meeting. The interest rate decision is announced at 12 noon on the second day.
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: given all the uncertainties and unknowns of the future, the MPC’s forecast has to involve the input of individual member judgements about the economy.
If you want to find out more or need advice about the implications of the MPC decisions for you or your business, contact one of the team who will be happy to help.
