INDEPENDENCE,TRANSPARENCY AND ACCOUNTABILITY IN MONETARY

POLICY-MAKING:

THE CASE OF THE BANK OF ENGLAND

STEPHEN P COLLINS

BANK OF ENGLAND

Types of autonomy• Goal autonomy, eg US Fed

- Congress sets parameters- Central bank selects target

• Target autonomy, eg ECB- Government selects goal- Central bank sets target

• Instrument autonomy, eg UK- Government selects goal and sets target- Central bank decides how to attain target

Independence (1)

Recent UK Monetary Policy History

1970s &1980s

1990-92

1992-97

1997

Various monetary targets

Membership of Exchange Rate Mechanism (exchange rate target)

Inflation target (interest rate decisions made by Chancellor of the Exchequer after discussion with the Governor)

Inflation target [Bank of England (Monetary Policy Committee) makes interest rate decisions]

Independence (2)

Objectives

In relation to monetary policy, the objectives of the Bank are:

a) to maintain price stability; and

b) subject to that, to support the economic policy of the Government, including its objectives for growth and employment

(This is enshrined in the Bank of England Act, 1998)

Independence (3)

Core Purpose 1Monetary Stability

Monetary Stability means stable prices and confidence in the currency. Stable prices are defined by the Government’s inflation target, which the Bank seeks to meet through the decisions on interest rates taken by the Monetary Policy Committee, explaining those decisions transparently and implementing them effectively in the money markets.

(This is enshrined in the Bank of England Act, 1998.)

Independence(4)

Core Purpose 2 Financial StabilityFinancial Stability entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank’s surveillance and market intelligence functions. They are reduced by strengthening infrastructure, and by financial and other operations, at home and abroad, including, in exceptional circumstances, by acting as the lender of last resort.

(This is enshrined in a Memorandum of Understanding between HM Treasury, the Bank of England, and the Financial Services Authority.)

Independence (5)

Monetary Policy Committee

5 Internal Members

4 External Members

GovernorDeputy Governor for Monetary PolicyDeputy Governor for Financial StabilityExecutive Director for Monetary Analysis (Chief Economist)Executive Director for Markets/Monetary Policy Operations

Can be full-time or part-timeCan only do other jobs that do not pose a conflict of interest

) Appointed by the Crown) for 5 years)

) Appointed for) 3 years by the) Governor after) consultation with the) Chancellor of the) Exchequer

) Appointed for 3 years ) by the Chancellor of ) the Exchequer

Independence (6)

Target for Price StabilityWas 2½% for RPI excluding mortgage interest payments (RPIX)

Is now 2% for Consumer Prices Index (CPI) [= Harmonised Index of Consumer Prices (HICP)]

Set each year by the Chancellor of the Exchequer

If inflation moves away from the target by more than 1% in either direction, the Governor is required to send the Chancellor an open letter explaining why, and setting out what the Bank proposes to do to ensure that inflation comes back to target.

Independence (7)

TransparencyMinutes of MPC meetings published two weeks after each meeting. Individual votes are shown, but not individual statements/positions.

Inflation report published quarterly.Shows inflation forecast up to three years ahead based on market and unchanged interest rates.

Parliamentary hearingsGovernor and MPC members appear before Select Committee on the Treasury quarterly

SpeechesGiven by all members of MPC

Transparency

Court of DirectorsThe Court of Directors consists of the Governor, both Deputy

Governors and 16 non-executive Directors.

There is a Sub-Committee of Court (“NedCo”) consisting of all the non-executive Directors, with a chairman designated by the Chancellor of the Exchequer

Among its responsibilities, NedCo is responsible for reviewing the procedures of the MPC, in particular whether the Committee has collected the regional, sectoral and other information necessary for the purposes of formulating monetary policy

Accountability (1)

Accountability to…

• Government

--- MPC appointments

--- Treasury observer at MPC meetings

--- Annual remit / possible Governor’s letter• Legislature

--- Select Committee hearings• Public

--- Minutes / Inflation Report / Speeches

Accountability (2)