MPC Membership

95.  The membership of the Monetary Policy Committee is set out in section 13 of the Bank of England Act 1998. It comprises the Governor and Deputy Governors of the Bank of England and two other executives of the Bank appointed by the Governor after consultation with the Chancellor, plus (under section 13(2)(c)), four members appointed by the Chancellor provided that he is satisfied that they have "knowledge or experience which is likely to be relevant to the Committee's functions".

96.  Since our previous report, a number of changes have been made to the membership of the Monetary Policy Committee (see Appendix 3). In our public hearings, we have refrained from questioning the merits, as economists or otherwise, of individual members, and we do not intend to comment on individual appointments. The Treasury Committee of the House of Commons has taken on a role in scrutinising individual appointments, on which we say more below, but we see our role being to examine the processes, procedures and methods of appointments. In doing so, we have tried to probe further matters on which, during our previous inquiry, we had difficulty in securing elucidation. As before, we have been greatly assisted in this process by all our witnesses but we would particularly like to thank the Noble and Learned Lord, Lord Nolan, for sharing with us his experience, not least from his time as the first Chair of the Committee on Standards in Public Life during which the Committee made recommendations about the procedure for making public appointments and proposed the appointment of a Public Appointments Commissioner. We return to Lord Nolan's evidence in detail below.

How appointments are made

97.   We first analyse how MPC appointments are in fact made. Those members of the MPC who are ex-officio under the Act have not concerned us. The appointments which are relevant to our work as a Committee are of the four members appointed by the Chancellor under section 13(2)(c). They are often called the "independent" members, although "external" is a better description. We were fortunate to have as witnesses several members who had been recently appointed and we asked each to tell us what had happened.

98.  Dr Sushil Wadwhani said that the approach came "totally out of the blue". He received a phone call, accepted and his appointment was announced five days later (QQ 640—643). Chris Allsopp too said that he was not sounded out in advance; that he was telephoned and said yes at once (as a member of the Court of the Bank of England, he already knew what the job would involve); and his appointment was announced two days later (QQ 756—761). Professor Stephen Nickell said that he was rung on a Tuesday and invited to a meeting on the following day at which he was invited to join. He said yes on the Thursday and his appointment was announced on the Friday (Q 762).

99.  The actual process of appointment seems very fast but, as the date on which appointments are due to end is usually known in advance, there must in our view be an earlier phase when alternative possibilities are examined in the Treasury, and any individual being considered for renewal is sounded out for availability. We were not able to get a very clear view of how long this process takes and who is involved. We therefore wished to probe how the Chancellor decides whom to approach and whether he could better inform his decisions.

100.  Some of our witnesses were able to shed light on the first of these matters. The Governor told us that he sends, via the Treasury, a list of possible names and "the Chancellor is perfectly entitled to take account of it or not as he chooses". He felt certain that the Chancellor would welcome a similar list from our own Committee. He added that the Chancellor had given him an opportunity to comment on certain individual appointments, and to meet an individual whom he had not met before. But he stressed that this was a consultation: "There is no question that it is his appointment and that it is a courtesy" (QQ 171—3). Mervyn King added that this discussion between the Chancellor and the Governor was not a "formal procedure" (Q 781). The CBI did not send a list, but felt that they could if they wanted to, particularly if there was "a very obvious person". Kate Barker, the CBI's Chief Economist, had discussed individuals with members of the MPC (QQ 260—263). Sir Andrew Turnbull, Permanent Secretary at the Treasury, said that "in practice" no one other than the Governor submitted a list but the Treasury was "always happy to have suggestions" of individuals or of "a catchment area" (QQ 370—6). The Governor's list provided a source of names to be used when necessary, "looking at the overall balance of the committee" (Q 375).

101.  We asked the Chancellor to tell us what his sources were for possible candidates. He denied that there was a list of potential MPC members in his back pocket, although there had been a list when the first appointments were made and when a vacancy arose the Governor submitted a list. He suggested that market sensitivities were an important factor but thought that hearings before parliamentary committees, plus the scrutiny provided by the MPC Minutes, ensured that both accountability and scrutiny of appointments were satisfied while protecting market sensitivity (Q 1231). He confirmed that he would welcome proposed names from our Committee or others (Q 1239).

102.  We also tried to discover what the Chancellor does with the names he is considering. Mervyn King told us that "a great deal of rigorous discussion and analysis goes on" and the length of notice to candidates was no less than that given to cabinet ministers (Q 771). As noted above, the Governor is sometimes asked for a view, but the Chancellor told us he said that there would be difficulties if it became known that a particular individual was under consideration because that would have an influence on people's perceptions of what might happen to interest rates (Q 1241).

Publicising of vacancies

103.  One fact that is clear is that vacancies are not advertised. Indeed, the fact of a vacancy is not normally known until it is filled, and even when a term of appointment is due to expire (which is known publicly) there is no certainty that a vacancy will in fact arise, as re-appointment is possible (QQ 268—270). Sir Andrew Turnbull justified the absence of a process of advertisement, "because we regard these as posts that have, or can have, a market significance attached to them" and said that vacancies arising through illness or other unexpected cause would be filled quickly (QQ 371, 373). The Governor, however, queried whether market sensitivities were a particular obstacle to a more transparent procedure for appointments, although the catchment area was narrow (Q 1280).

104.  Lord Nolan questioned whether advertising would actually bring out new names not previously known to those making the appointment, given the "relatively restricted area" in question (Q 684).

105.  We can see that, with a Committee such as the MPC which takes decisions rather than merely being advisory, there would be a danger if it were known that a member with particularly strong views was due to retire and that, replacements having been advertised for, it was clear that there was no automatic presumption of re-appointment; that the combination of these pieces of information could affect the market and that conclusions about the state of the economy might be drawn from a presumption that individuals of a different outlook might be under consideration. Other arguments against advertising could be that advertising would demean the dignity of the post, that it could undermine the credibility of the Chancellor in making the appointments, or that the Chancellor might wish to appoint someone not willing to apply publicly. On the other hand, advertising might in fact lead to a wider constituency of potential appointees or to an unexpected application by an individual thought, by the Chancellor, unwilling to serve. On balance, our conclusion is that there is a valid distinction between advertising for a particular appointment, in particular at the time it is to be made; and a more general process of encouraging possible appointees to make their interest known to the Treasury. We recommend that the Treasury makes known the existence of vacancies in the MPC so that people can put themselves forward and that it publicises from time to time the fact that nominations are always welcome.

Transparency of the appointment process

106.  A second question is whether the process of appointments is sufficiently transparent. In moving the second reading of the Bank of England Bill, Lord McIntosh of Haringey stressed to the House that the new arrangements in the bill would establish a Bank that was "fully accountable"[39]. Yet the absence of any general understanding of how and why appointments are made seems to us — and Lord Nolan agreed (Q 682) — to undermine any understanding of how well the system is working. Kate Barker saw merit in the process being more open. This, she suggested, would perhaps end the debate on process, which was probably unhelpful to the individuals themselves (Q 266). We can see from this argument that a more transparent process of appointment would give reassurance that the independent members are truly independent, and avoid accusations of "cronyism" and "exclusivity". We ourselves do not believe that there has been cronyism but it does concern us that appointments have tended to be confined to the London/Cambridge/Oxford triangle. A trawl of the "usual suspects" in any process of appointment runs the risk of becoming too narrowly focused and lacking in the rigour and objectivity which the Treasury, rightly in our view, expects to be involved in such a process.

107.  The Government's response to our First Report referred to a need for confidentiality. It stated[40] that "The Nolan procedures formally cover...the MPC. However, given the highly market sensitive nature of MPC appointments there is a need for a particularly high degree of confidentiality in this process". The Chancellor told us that, while appointments were formally covered by the Nolan procedures, market sensitivity meant that not all of the detailed requirements of Nolan were met (Q 1236). As we were not instinctively satisfied of the merits of the market sensitivity argument, we probed it with our witnesses. The Governor did not think that the appointments that had been made were market sensitive (Q 1279). Lord Nolan indicated to us that the use of the words "however" and "formally" implied that "acceptance of the Nolan principles was not unqualified" (Q 655). He thought that submitting the process to the scrutiny of the Committee on Standards in Public Life might act as a long-stop when there were sensitivities about conflicts of interest (Q 658), whereas Mervyn King could not see the relevance of Nolan procedures to whether people would complain about candidates for the MPC (Q 773). Interestingly, Lord Nolan did not see why the degree of confidentiality was incompatible with the Nolan principles of openness (Q 652), but the present system of appointment did not meet that test (Q 696). Chris Allsopp and Professor Stephen Nickell confirmed that they would still have applied had Nolan procedures been in place (QQ 782—3).

108.  The overwhelming consideration must remain whether the process produces the best people to do the work given to them. Before asking this question, we will consider briefly certain other relevant questions arising in the process of appointment, namely how long appointments are for; whether they are renewable; and whether they should be full-time or part-time

Period of appointment

109.  Under the Act appointment to the MPC is for a term of no more than three years (renewable). In our last report we recommended a period of five years, with renewal, "rare_.if not impossible"[41]. During the debate on our report it was suggested (by the Shadow Lord Chancellor, Lord Kingsland), that, to avoid a question of political influence at the moment of renewal, MPC members needed, in order to retain credibility, to be appointed for longer than the length of a Parliament[42]. The Bank of England Commission recommend a non-renewable six-year term[43]. Kate Barker from the CBI supported a longer appointment than at present, but without renewal (Q 264). Lord Nolan, on the other hand, thought three years (with renewal), "quite good" and could not see merit in linking appointments to the parliamentary five years (Q 697). We think that our original recommendation —a five-year term with very rare renewal- is still right.

Full-time and part-time appointments

110.  Some of our witnesses had views on whether appointments should be full-time or part-time. We previously recommended that not all the external members should be full-time appointments. Part-time members could be more liable to conflicts of interest but the fact that there are some MPC members who also hold positions in the Bank and are by definition part-time seems to imply that full-time appointments are not inevitable. Full-time appointments might lead to criticisms of lack of independence or of breadth of view, or in the case of external members that they might "go native" in the culture of the Bank. The Governor told us that part-time appointments could widen the range of people to choose from (Q 160), while the CBI thought that individuals appointed part-time would have sufficient time to get out and about and have discussions (Q 258). The Chancellor stressed that there was an on-going evaluation of the balance between full-time and part-time appointments, and of the time constraints imposed by working on the MPC (Q 1235). Again, we stand by our original recommendation that not all the external members should be full-time appointments.

111.  In our view, the questions of length of appointment and whether appointments are full-time or part-time are helpful in informing discussion of more significant issues, namely whether the existing MPC members are drawn from too narrow a field, whether conflicts of interest are a significant problem, and what kind of scrutiny is necessary to show that appointments are properly and appropriately made.

Qualities required of members

112.  What kinds of people should be on the MPC? As we indicated in our previous report, all MPC members "are intended _ to be knowledgeable in ways relevant to the formulation of monetary policy". The Governor confirmed that he wanted "the best technical experts_.you can get hold of" (Q 151). Mervyn King confirmed that he thought MPC members would need to be experts in monetary policy - which was not the same as being experts in the narrow field of monetary economics (Q 751). Michael Portillo MP, Shadow Chancellor of the Exchequer, thought that the MPC was a technical Committee (QQ 924, 926) but the Chancellor stressed that members' judgement was what mattered (Q 1223) and the MPC would be judged on its effectiveness (Q 1233).

113.  Sir David Lees, too, thought that the primary quality required was to be "expert technicians", people "technically extremely competent" (Q 497). David Clementi saw the need for "relevant expertise" but supported, as a "balanced judgement", our previous conclusion, that not all MPC members needed to be experts in monetary economics. Breadth of experience and judgement were, he said, necessary too. But the common language of economics was a prerequisite as was familiarity with basic economic technique (Q 583). Ian Plenderleith saw the need for members to have relevant expertise on top of understanding of basic monetary policy processes (Q 586). For Chris Allsopp, economists with reasonably wide experience were needed — people who knew about other things that were going on in the world (Q 752).

114.  The significant question for us was what kind of expertise is required in the members of the MPC. There are arguments for having strong academic representation: Dr Sushil Wadwhani thought that a "critical mass" of academic members was needed to avoid one or two individuals dominating the forecast process, which was essentially a technical matter (Q 586).

115.  The TUC, however, wanted to see members with more "oil under the fingernails" and a "stronger sense of industry", although that was becoming harder to find as major companies dispensed with their economists (QQ 539, 571). Hence there is also an argument for the MPC to have among its members those with a sense of the real state of industry, but our witnesses did not want to see formal representation from various sectors of the economy. For the CBI, judgement and a sense of how things affected business were important, on top of an economic background (Q 258), for the Engineering Employers Federation what was needed were "good, qualified economists of repute" preferably with broader business or industrial experience (Q 496), while Lord Nolan, although having no strong view, thought it better that views were put to a Committee neutral between different sectors of the economy rather than having "members who are representative of the direct interests of the parties" (Q 660). Of course, a cynic might say that the bankers on the Committee might represent the interests of bankers.

116.  The general view seemed to be that concerns about a possible narrowness of view among the MPC members were best met by ensuring a balance between members. Sir Andrew Turnbull accepted that the field of choice had "narrowed", but not damagingly, and that a balance was needed between different kinds of economists "coming together and capable of producing the judgements that the Act requires" (QQ 380—387). The Chancellor looked at "the overall balance of the Committee" in making new appointments (Q 375) and he stressed that the Bank had comprehensive systems in place to gather information from across the country and from all sectors of the economy (Q 1234).

117.  Mervyn King confirmed that the MPC wanted "a balance of different backgrounds and experience". Necessary qualifications included an understanding of the case for low inflation and an ability to explain the decisions, which meant presentational skills and toughness as well as a capacity for teamwork. But a range of expertise was also vital, although the Committee in fact only had one, very clear, decision to make, namely to vote for the level of interest rates. People from different backgrounds nevertheless helped to bring new thinking to bear (QQ 786—787). Overall the process was decision by committee, a group, all of whom made a contribution (QQ 165). The TUC, however, had some concerns about the balance of experience on the Committee, and a possible lack of feel for what was actually happening in industry (Q 564).

118.  In our view the arguments about market sensitivity are out-weighed by the need to ensure a proper balance of relevant expertise on the MPC. It would be unfortunate were such an argument to lead to a narrow base for MPC membership. We were accordingly reassured to note a number of recent appointments of individuals with expertise other than as monetary economists, and we welcome this apparent broadening of the base of potential MPC members. We would be concerned were the MPC to be drawn only from academic monetary economists and therefore give rise to little more than a technical committee of experts. We hope that the Chancellor and his successors will continue to be of this view when making future appointments to the MPC.

Conflicts of interest

119.  A different question arises, however, from a genuine and well-motivated desire to see the necessary balance of expertise on the Committee. Does this not open up the possibility of undesirable conflicts of interest? The Governor told us that such considerations ruled out as full-time MPC members those continuing to work in a financial market capacity or a financial services group (Q 153). Sir Andrew Turnbull confirmed that "a very strict view" was taken, because British public life was very demanding in such matters. A relevant expert from a bank or major commercial company would not be judged acceptable; a regulator or servant of a non-commercial public board might be (Q 385). Dr Brash too saw conflict in an MPC member who was a company chief executive or Director (Q 448). For Lord Nolan, the relatively small size and limited function of the MPC contributed to the danger of conflict of interest: one individual might dominate the committee if they were a strong, prominent "representative member" from manufacturing industry (QQ 656, 659). The small size of the MPC also meant that a declaration of interest would not be a sufficient safeguard (QQ 663, 665). The French system already has procedures in place to deal with conflict of interest issues, although the Governor thought that the French involvement of those from a commercial field was in the event quite restricted (Q 154).

Scrutiny of appointments

120.  We consider that there are a number of different methods of ensuring that the appointments to the MPC are judged to have been made in an appropriate and proper fashion. These fall into two broad categories: procedures during the process of appointment; and post facto scrutiny, including confirmation by Parliament. Possible forms of pre-appointment scrutiny include the Nolan procedures, the difficulties with which we have referred to above (paragraph 107). There are a number of other forms of pre-appointment scrutiny. Lord Nolan wondered why the Commissioner for Public Appointments could not be involved (Q 649). That office was well suited to intimate confidential and detailed investigation by a very small number of individuals (Q 672). Certainly some form of independent scrutiny was required of the Chancellor's decisions (Q 654) and the process of "filtration" would have to take place at the same time as the decision was made on an appointment. That was a significant element of the Nolan principles (QQ 674—6).

121.  An alternative would be post facto scrutiny by way of confirmation hearings. The House of Commons Treasury Committee does in fact conduct such confirmation hearings and has both indicated that it will carry on doing so and called for such hearings to be put on a statutory basis. In May 2000, the Committee reported that the Chancellor should think again about Chris Allsop's appointment[44]. They had had evidence from the Chancellor and the Bank that such hearings were of value[45] but in his appearance before our Committee, the Governor was not convinced of the value of the hearings and suggested that if they became too frequent, potential applicants might be deterred (Q 1274). Peter Riddell[46] has suggested that "this ex-post arrangement, whilst useful, is no substitute for prior scrutiny and approval", although it would be possible to define what is relevant in ratification, perhaps on the basis of a two-tier system, with some appointments going through automatically unless vetoed, and with others requiring positive approval. The Chancellor, however, was more positive that the scrutiny system was a good system: it had only been in existence for two years and as the procedures developed they would become more constructive and more informative (Q 1227).

122.  Lord Nolan doubted whether a statutory duty on the Chancellor would be of value: "it is really almost a question of good manners_..that he should explain to the House in as much detail as he can, possibly giving the reasons for his choice" (Q 671). On the other hand, scrutiny hearings (such as those conducted by United States Senate Committees) could deter good applicants and a blocking veto on appointment, whether by a joint committee or a committee of one House, would disrupt the daily work of the MPC (QQ 700—702). We would add that such a veto would weaken Ministerial accountability for appointments, although we accept the TUC's view that the work of the Commons Treasury Committee in this area adds value in bringing "public exposure" to the process (Q 564). We note the continuation of non-statutory confirmation hearings by the Treasury Committee. We do not propose such confirmation hearings for the new Economic Affairs Committee. We do call on the Chancellor, however, to report to Parliament on the merits and implications of involving the Commissioner for Public Appointments in prior scrutiny of MPC members.

40   Printed in Appendix 5, paragraph (6). Back

41   Paragraph 7.14. Back

42   House of Lords Debates, 4 November 1999 Col 1077 Back

43   Paragraph 7.21. Back

44   7th Report from the House of Commons Treasury Committee, Session 1999-2000 (HC520-I), paragraph 5. Back

45   8th Report from the House of Commons Treasury Committee, Session 1998-99 (HC505), paragraph 40. Back

46   "Parliament under Blair " (Politicos 2000) page 94. Back