Budd spells out MPC's methods

THE DECISION-MAKING process of the Bank of England's Monetary Policy Committee (MPC) is today spelt out by one of its members, amid concerns that a lack of information about the way its decisions are made could undermine the Bank's independence.

Writing in November's Economic Journal, Sir Alan Budd stresses that economic judgement plays a key role in Bank decisions, and explains that the MPC does not react to temporary changes in inflation, even if this means inflation misses its target.

Instead, Sir Alan writes, the MPC concentrates on the inflation outlook two years ahead.

He says: "Focusing on a period one to two years ahead provides a practical and approximate way of meeting the Chancellor's instruction that the target is 2.5 per cent at all times while avoiding undesirable fluctuations in output."

In his article, Sir Alan sets out one of the most detailed accounts to date of the MPC's decision-making process.

He emphasises the importance of the Bank's 12 regional agents, three of whom brief the MPC on anecdotal and survey evidence on the Friday preceding the monthly interest-rate meeting. In this regular pre-MPC meeting, which usually lasts a full day, the committee also hears detailed evidence from Bank economists on a wide range of issues.

The interest rate meeting itself is spread over two days, occupying an afternoon and the following morning. On the first day, the MPC revisits the issues raised in the Friday briefing, reserving discussion of the appropriate policy reaction until the next morning.

At the time of the quarterly inflation forecast the MPC has a series of lengthy meetings with Bank staff.

The MPC always holds a monthly interest rate meeting the week before the forecast is published, when it chooses the level of rates most likely to return inflation to target by the end of the two-year forecasting period.

Although the MPC has now been setting interest rates for more than a year, there is still uncertainty in the City about how the committee works. The perception that it is too insulated from the real world has attracted heavy criticism from industry.

Confusion about the precise interpretation of the inflation remit has also prompted concern in academic circles.

Writing in the same edition of the Economic Journal, Professor Charles Bean says that the Chancellor's phrasing of the inflation remit - in particular, the fact that the MPC is not told how quickly inflation should be brought back to target - runs the risk of jeopardising the Bank's independence.

However, Professor Bean concludes that, in practice, the scope for political interference in setting rates is limited.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test