Monetary Policy Committee
|Monetary Policy Committee|
Interest rates since the Committee's inception
|Purpose/focus||Determining monetary policy|
|Parent organization||Bank of England|
|Website||Monetary Policy Committee|
The Monetary Policy Committee (MPC) is a committee of the Bank of England, which meets for two and a half days every month to decide the official interest rate in the United Kingdom (the Bank of England Base Rate). It is also responsible for directing other aspects of the government's monetary policy framework, such as quantitative easing. The Committee comprises eight members, along with the Governor of the Bank of England (as of 2013 Mark Carney), and is responsible primarily for keeping the Consumer Price Index (CPI) measure of inflation close to a target set by the government (2% as of 2011). Its secondary aim – to support growth and employment – was reinforced in March 2013.
Announced on 6 May 1997, only five days 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 be independent of political interference and thus to add credibility to interest rate decisions. Each member has one vote, for which they are held to account: full minutes of each meeting are published within two weeks, and members are regularly called before the Treasury Select Committee, as well as speaking to wider audiences at events during the year.
The Committee is responsible for formulating the United Kingdom's monetary policy, most commonly via the setting of the rate at it which it lends to banks (officially the Bank of England Base Rate or BOEBR for short). As laid out in law, decisions are made with a primary aim of price stability, defined by the government's inflation target (2% on the Consumer Price Index as of 2011). The target takes the form of a "point", rather than the "band" used by the Treasury prior to 1997. The secondary aim of the Committee is to support the government's economic policies, and help it meet its targets for growth and employment. That secondary aim was reinforced by then Chancellor of the Exchequer George Osborne in his March 2013 budget, with the MPC given more discretion to more openly "trade off" above-rate inflation in the medium run to boost other economic indicators. The MPC is not responsible for fiscal policy, which is handled by the Treasury itself, but is briefed by the Treasury about fiscal policy developments at meetings. Criticism of the MPC has centred around its predominant focus on inflation to the detriment of growth and employment, although that criticism may have been mitigated by the March 2013 revisions to the committtee's remit. There have also been complaints about the reluctance of lenders to pass on rate changes.
Under the Bank of England Act 1998 the Bank's Governor must write an open letter of explanation to the Chancellor of the Exchequer if inflation exceeds the target by more than one percentage point in either direction, and once every three months thereafter until prices are back within the allowed range. It should also set out what plans the Bank has for rectifying the problem, and how long it is expected to remain at those levels in the meantime.
In January 2009 the Chancellor announced an Asset Purchase Facility (APF), to be administered by the MPC, aimed at ensuring greater liquidity in financial markets. 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. As of February 2013, the proportion of the total fund held as gilts stood at more than 99.99%.
Traditionally, the Treasury set interest rates. After reforms in 1992, officials held regular meetings and published minutes, but were not independent of government, leading to a feeling that political factors were clouding what should be purely economic judgements on monetary policy.
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. 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). The Act gave the government responsibility for specifying its price stability target and growth and employment objectives at least annually. The government reserved the right to instruct the Bank on what rate to set in times of emergency.
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 sit 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".
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. Under the Bank of England Act, on 16 April 2007, the governor (then 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%. With prices more unstable since 2007, as of February 2013, he has had to write 14 such letters to chancellors.
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, the base rate was cut six times to an all-time low of 0.5% in order to avoid deflation and spur growth. In March 2009, the MPC launched a programme of quantitative easing, initially injecting £75 billion into the economy. 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, a figure later increased by a further £75 billion in the months following October 2011. The MPC announced two further £50bn rounds of quantitative easing in February and July 2012, bringing the total to £325 billion whilst simultaneously keeping the base rate at 0.5%. In March 2013, the Chancellor of the Exchequer, George Osborne, called on the MPC to follow its American counterpart (the Federal Reserve Board) in committing itself to keeping interest rates low for a prolonged period of time.
The Committee comprises:
- 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, for which they can be held publicly accountable. The Governor chairs the meeting and is the last to cast his vote, acting as a casting vote in event of a tie. Representatives from the Treasury can attend the meeting, but only as non-voting observers.
After a half-day "pre-MPC meeting", usually the Friday before, meetings are held over two days, typically on the Wednesday and Thursday following the first Monday of each month. 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.
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. 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. The interest rate decisions are announced at noon of the second day of the meeting, following the conclusion of the meeting. 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.
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.
To date, 27 men and 4 women have served on the MPC. The current Committee comprises (by status):
- Mervyn King (June 1997 – 30 June 2013, 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 2014, currently Executive Director for Markets)
- David Miles (1 June 2009 – 31 May 2015, external member)
- Ian McCafferty (1 September 2012 – 31 August 2015, external member)
- Martin Weale (1 August 2010 – 31 July 2013, external member)
- Ben Broadbent (1 June 2011 – 31 May 2014, 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)
- Andrew Sentance (1 October 2006 – 31 May 2011)
- Adam Posen (1 September 2009 – 31 August 2012)
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. As of 2007, Kate Barker is the only external member to date to have been appointed for three terms, but she is stepping down after July 2010.
See also 
- Federal Open Market Committee, the equivalent structure in the United States' Federal Reserve System
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- 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)