Sir Alan Budd argues that the two-year lag between interest rate and inflation changes and the part played by luck, mean the MPC should be judged in the light of forecasts of inflation at the time interest rates are changed rather than its eventual success with the actual inflation rate.
The committee should do whatever is needed to keep consensus forecasts of inflation near the 2.5 per cent target.
By this standard, the MPC has been doing a good job, he concludes. Expected inflation has fallen steadily since May 1997 to around that level. "The MPC collectively can draw some modest satisfaction from developments so far," he writes in the London Business School's latest Economic Outlook. "The actual inflation path has benefited from an element of luck; but the fall in inflation expectations shows that this success is expected to continue."
He notes that it was the controversial decision to raise interest rates by a quarter point in June 1998 that really shifted economists' forecasts of inflation down to 2.5 per cent.
The rationale for Sir Alan's argument that assessing the MPC is not as simple as comparing actual inflation with the target is the fact that interest rates only affect inflation with a delay of up to two years.
Moreover, within that two-year period, all sorts of unexpected events will influence the inflation rate too.
Interest rate decisions could therefore be correct at the time, even if they turn out to be wrong with the benefit of hindsight, or vice versa.
As Sir Alan points out, it is a mistake ex ante to buy a National Lottery ticket because your expected win will be negative, but the jackpot winner obviously made the right decision ex post. However, he notes that the Treasury Committee, responsible for monitoring the MPC's performance, did not appear to be convinced by this argument.
In a recent report it said it would use contemporary forecasts as a benchmark, but added: "A degree of past accountability is also called for."
Sir Alan stepped down from the MPC at the end of May.