The Monetary Policy Committee (MPC) and the Court of the Bank of England welcome the Treasury Committee's Report into "The MPC of the Bank of England: ten years on". Both the MPC and Court acknowledge the thoroughness with which the Committee has undertaken its task. The MPC would also like to take this opportunity to thank the Committee for the manner in with which it has conducted its regular scrutiny of the MPC's decisions over the past decade. Those hearings have been an essential ingredient in establishing the legitimacy of the present monetary framework.

The first part of the Committee's Report contains reflections on the economic context and on the monetary policy framework. The MPC's views on the economic context were conveyed at length in the Bank's original submission to the enquiry and further commentary here is unwarranted.

With regard to the monetary policy framework, the Committee endorses the present symmetric inflation target for the Consumer Prices Index, with the numerical value for that target set annually by the Chancellor of the Exchequer. While the framework is a matter for the Government and HM Treasury rather than the Bank of England, the MPC welcomes the Committee's support for the current framework, which the MPC believes has served the country well over the past decade.

The rest of the Committee's Report contains a number of recommendations relating to the MPC as a body and the transparency of the MPC. These are more directly addressed to the MPC or Court and MPC/Court's responses are recorded below. For ease of reference, the Committee's recommendations are re-iterated (in bold, numbered paragraphs), with the MPC/Court's response following, as appropriate.

We are mindful of the need to ensure that the MPC remains independent, and to allow a flexible system of terms and conditions that can enable recruitment from the widest base. We therefore recommend that, should the Bank of England Act 1998 be modified in the future, a new term of office for 'external' MPC appointments be instituted, based on a six-year term, with no option of reappointment, with a three year minimum, after which continuation would take place only with the agreement of both the Non-Executive Committee of the Court of the Bank of England and the postholder. This would give the flexibility to remove those who are unfit for the job, retain flexibility for those who might wish to leave the post early, and ensure continuation was not at the discretion of the Chancellor of the Exchequer. (Paragraph 68).

The length of term for all members of the MPC is a matter for Government and Parliament. However, both the MPC and Court believe that the spirit of the Committee's recommendation for longer, but non-renewable, terms for the external members is desirable. From the MPC's perspective, some turnover of external members is desirable in order to ensure regular injections of fresh thinking, but longer terms help to build and maintain the MPC's experience; the particular length of term chosen should balance these two considerations. But it would not be sensible to expect all external members to commit to serve a longer term, as that might make some candidates unwilling to join the Committee. That is particularly the case for academics, who are generally unable to secure leave of absence for more than three years.

Whatever length of term the Government chooses, Court does not believe that it should play a role in the appointment or re-appointment of MPC members, as that would usurp the proper role of Government in determining the make-up of the MPC, as well as potentially weakening the independence of members approaching re-appointment. But in the unlikely event that an individual's behaviour is unfit or incompatible with their continued membership of the MPC, Court should be able to remove them at any time, a power that it has already under the existing Bank of England Act.

We find the explanations of why the full-time option was removed for all 'external' members unconvincing, especially for new members of the Monetary Policy Committee. We recommend that all working patterns be available to 'external' members of the MPC, so that they may undertake their duties as they see fit, as their career progresses. (Paragraph 70).

The terms and conditions for external members is a matter for Court. The Chairman of NedCo holds annual meetings with individual MPC members and has discussed this matter with the 'external' members.

Court is of the view that the formulation of monetary policy is not a full-time occupation. 'Internal' members of the MPC spend a significant part of their time executing line management responsibilities, rather than setting interest rates; it is not practical to try to provide such additional line responsibilities for the 'external' members. Moreover, it is not their previous employment that distinguishes 'external' members from 'internal' members —a majority of the current group of 'internal' members were, for instance, appointed from outside the Bank. Rather, it is that the 'external' members continue to have links outside the Bank after they have taken up membership of the MPC, thus facilitating the injection of fresh thinking into the MPC's deliberations.

Court therefore believes that 'external' membership should normally be part time— typically the equivalent of three days/week. However, Court recognises that some flexibility may be required while an appropriate additional role external to the Bank is secured, when external members come from a business or financial market background and cannot continue their existing employment on a part-time basis. Consistent with this, Court notes that securing suitable additional external employment would be facilitated if appointments to the MPC are made in a timely fashion and would ask that the Treasury also recognise this issue at the time of appointment.

We welcome the changes to the appointments process for 'external' members of the Monetary Policy Committee outlined by the then Chancellor of the Exchequer in evidence to us in June 2007. We welcome the fact that Government will advertise for different qualities and skills for each new 'external' member of the Monetary Policy Committee. We hope that they will lead to timely appointments of experts suited to the role of Monetary Policy Committee member. We note that there is no current proposal for a confidential pool created of experts who could be nominated to the Monetary Policy Committee where posts need to be filled at short notice. We therefore recommend that the Government consider adding a note to candidates as part of the appointments process asking them if they would be willing to form part of such a pool if not selected for the current vacancy. (Paragraph 79).

Court and the MPC believe that the maintenance of a confidential pool of candidates with the appropriate skills and experience would be valuable and would help facilitate vacancies being filled in a timely fashion. Court and the MPC therefore support this recommendation and would welcome the opportunity to work with the Treasury on succession planning.

We welcome the Government's commitment to enable appointment hearings by this Committee for nominees for the post of 'external' member of the MPC to take place prior to formal appointment. We note that the Government considers such hearings would be "non-binding". We consider it important that such hearings can be scheduled sufficiently far in advance of the date of the formal appointment to enable the Chancellor of the Exchequer to be able to give proper consideration to any view expressed by the Treasury Committee without there being a danger of the MPC membership being temporarily reduced as a result of reconsideration of a nominee. We recommend accordingly that nominations be announced at least three months prior to the date on which the vacancy falls to be filled. We also consider that, if the Treasury Committee were to reach an adverse opinion on a nominee, which would only be after careful and considered reflection, the Committee ought to have the power to require a debate in the House of Commons on the nomination. (Paragraph 82).

Court and the MPC believe that it is important that vacancies are filled in a timely fashion after due process has been fulfilled, including appointment hearings before the Committee. Court and the MPC therefore welcome the recommendation that nominations be announced at least three months in advance in order to allow these to take place before a new member joins the MPC. The suggestion that the Committee should have the power to require a debate in the House of Commons in the event that it considers a nomination unsuitable is a matter for Parliament.

We have heard differing views on the need for monthly meetings of the Monetary Policy Committee. With hindsight, it would have been better if the Bank of England Act 1998 had not mandated monthly meetings, but had left the number of meetings each year to be determined by the Court of the Bank of England on the recommendation of the Governor, but subject to the following conditions: that there were to be a minimum of eight annual meetings, that Monetary Policy Committee meetings were to be evenly spaced across the year, and that MPC meetings were to be pre-announced with a year's notice, except in 'emergency' cases. We therefore recommend that, should changes to the Bank of England Act 1998 be required for any other purpose, these changes be made at that time. (Paragraph 86).

While the MPC does not see the need for change as pressing, were the Bank of England Act to be amended for other reasons, the MPC would welcome scope for greater flexibility in regard to the timing of its meetings. It agrees that the stipulation of a minimum of eight meetings each year would be sensible, although the requirement that they be evenly spaced would mitigate against them being held at optimum points in the data release cycle.

We believe that the present Court of the Bank of England is too large and should be reduced in size. We note the role played by the Court in the accountability process of the Monetary Policy Committee. We will continue to monitor the decisions of the Court, and at times may request additional information from it relating to the Monetary Policy Committee to ensure that it is undertaking its proper functions as related to the Monetary Policy Committee. (Paragraph 91).

Court concurs with the Committee's recommendation to reduce its size. Court welcomes the Committee's interest in its oversight of the MPC and its processes and is ready to provide additional information when requested.

We acknowledge the efforts the Monetary Policy Committee has made in educating the public, especially via its programmes for younger people, about its role, and the need for low inflation. However, certain of the Bank's own measures of the public's understanding remain low. We recommend that the Monetary Policy Committee and the Bank of England consider what the public need to know about the monetary policy framework, and then, with assistance from the Treasury if needed, consider a public education campaign to put across those points. It is important that if there are more uncertain times ahead, the public must understand and support the reasons behind movements in interest rates. (Paragraph 99).

The MPC fully concurs with the Committee about the importance of educating the public regarding the case for low inflation and the Bank's role in securing price stability. The MPC believes that it has been reasonably successful in reaching the professional and business audience, through both its speaking programme, regional visits and the activities of the Agents, though of course there is always more that can be done. And the widespread use in schools of the Bank's general teaching resources and the success of the Target 2.0 Competition have helped to get the message out to the young. But reaching a much wider audience is significantly more challenging, though we are deliberately trying to increase our involvement in events with such an audience. We are also planning to have a special exhibition on inflation and its control in the Bank's museum this year. And the Bank's website is being developed in order to make it more informative for the general public. The MPC will continue to place a high priority in advancing this agenda.

Whether or not the Monetary Policy Committee provides a forecast of future interest rates, there appears to us to be a need for more information to be provided by the Monetary Policy Committee to aid both financial markets and the general public. We therefore welcome the Governor's thoughts on providing more information around possible policy reactions should certain risks crystallise. However, we also recommend that the Bank undertake regular work to assess the current academic thinking on the feasibility and desirability of publishing an interest rate forecast, and keep this matter under review. (Paragraph 108).

The MPC is continually trying to improve the presentation of the thinking behind its interest rate decisions, both in the Minutes and in the quarterly Inflation Report. In this respect, in Section 5 of the August 2007 Report, the MPC expanded its coverage of the risks to the conjuncture and the associated implications for policy. With regard to publishing a forecast for interest rates, the MPC is watching with interest the small number of other central banks that have recently begun to do this. Bank staff are in regular contact with their counterparts at these central banks and also seek to keep abreast of academic thinking on this issue. The MPC keeps its own procedures under constant review in the light of experience elsewhere, as well as developments in academic thinking.

We have heard different views on the need for immediate transparency on the voting pattern of the MPC. We have concluded that the balance of arguments supports the need for immediate transparency of MPC voting, which would allow financial markets to assess the strength of the support within the MPC for any given decision. We recommend accordingly that the Bank of England publish, alongside the interest rate decision, the outcome of the vote, indicating which individual MPC members voted which way. (Paragraph 112).

The MPC remains doubtful of the wisdom of revealing the vote before the associated explanation. Knowledge of which way someone voted does not explain why they voted that way. Given that a member could not expand on the reasons for his/her vote until after publication of the minutes, releasing the vote at the time of the decision runs the risk of encouraging media speculation on the reasons for an individual's vote and increases the simple-minded tendency to portray members as 'hawks' or 'doves'. Moreover, the vote does not always provide a good guide to how close a rate decision was. Each member could agree that a decision is extremely finely balanced, yet the result turn out unanimous. Conversely, if the MPC is quite polarised, a 5-4 to hold would not indicate that a vote to change rates is necessarily near at hand. So in the MPC's view, little value should be attached to individual votes without the accompanying explanation that appears in the Minutes. The MPC therefore continues to believe that the current arrangements are to be preferred.

We were pleased to hear that the Bank is considering a structured set of discussions between professional economists and staff members of the Bank, and members of the Monetary Policy Committee. We recommend that the Bank provide to this Committee within six months an outline of a plan for such meetings, that allows for a diverse membership of participants, and allows for an open and transparent record to be kept. (Paragraph 113).

MPC welcomes the Committee's endorsement of moves to strengthen contact with professional economists external to the Bank. We are presently deliberating over the most suitable format and frequency for such events and will be in touch with a range of potential outside participants to gather their suggestions. We expect to host the first such event sometime in the first half of 2008.

We are concerned about the effects on the debate within the Monetary Policy Committee of having a paragraph assigned to each member. However, we believe greater thought should be given by the Monetary Policy Committee to ensuring that the balance of views of members is more identifiable with particular individuals, rather than just identifying how individual members voted. We therefore recommend that, whenever the minutes at the moment refer to "one member", that member be named within the text. (Paragraph 116).

The Committee's own Report amply covers the disadvantages of associating views in the minutes with particular members, namely that it may discourage free debate and the exposure of arguments in order merely to test them. The MPC believes that these reasons apply just as much to arguments advanced by one member as to those advanced by more than one member, and that speeches, media interviews and appearances before the Committee offer plenty of opportunity for the exposure of the views of individual members.

We have listened with care to the arguments against each member of the Monetary Policy Committee providing an annual report to this Committee. We have particularly reflected upon the concern that such reports might focus attention on a particular date. However, we are persuaded that regular reports by each member of the Monetary Policy Committee to this Committee would further enhance their individual accountability and enhance the value of our regular hearings with members of the Monetary Policy Committee about inflation reports. To overcome concerns about timing, we will request each member to prepare his or her report for a 12-month period ending with a different month. We wish to receive a report on that basis from each member of the Monetary Policy Committee which:

• lists the work they have undertaken to promote transparency in and wider understanding of monetary policy in the preceding year;
• assesses their own voting record in the Monetary Policy Committee over that period; and
• sets out their thoughts on monetary prospects for the coming year. (Paragraph 119).

There are now (at least) four appearances annually by the MPC before the Committee. Together with the increased questioning by the Committee of all MPC members, that has improved the accountability of the MPC to Parliament.

The MPC notes the Committee's desire for annual individual reports in order to enhance individual accountability and the value of the hearings. However, the suggested content of these reports does raise some issues. In particular, the MPC has tried to strike a balance between its collective and its individual communications with the markets, media and general public. That balance would potentially be disturbed if members were each to provide a lengthy written individual annual report containing an evaluation of their voting records and an assessment of monetary policy prospects, detracting from the collective message that is embodied in the Inflation Report and MPC Minutes. Moreover, because of the lags in the effects of monetary policy on inflation, members cannot in any case properly assess their voting record over the past year. And because interest rate decisions are taken one month at a time, neither is it possible for MPC members to set out their thoughts on the prospects for interest rates.

MPC members can, however, explain the reasons for their votes over the past year. And linked to that, they can explain their view of the outlook for inflation and the risks they see to that outlook. But the MPC believes that the voting record and speeches given by each member already provide the necessary background for scrutiny by the Committee. Individual accountability would then be best enhanced by the Committee using its ability to probe viewpoints and differences among members in oral questioning rather than through the provision of additional written reports.

The MPC therefore suggests that, in the future, individual members will provide a standard form to the Committee containing a record over the previous year of: votes cast; on-the-record speeches (with web links); and other activities promoting understanding and transparency.[2] Members could provide this information to any timetable that the Committee desires. But perhaps the most effective arrangement would be for each of the five members called to appear before the Committee at a regular hearing to submit such a form. In that way the information would be fresh and up-to-date and thus a suitable point of departure for the Committee's oral questions.