MPC takes heed of industrial surveys

THE MONETARY Policy Committee (MPC) pays serious attention to business surveys, contrary to accusations that it is remote from industry, according to an article to be published in the Bank of England's Quarterly Bulletin on Wednesday.

Gloomy surveys from the Confederation of British Industry (CBI) and British Chambers of Commerce (BCC) influenced the MPC's assessment of the risks to the economy last autumn, when it had started cutting interest rates. The article also spells out how consumer confidence and business optimism surveys are used for information about likely future consumer and investment spending.

The explanation of how the monetary committee uses the information from the coalface of business should help appease critics who say its members are too remote from industry. The Committee also uses reports from the Bank's regional agents, and the Bank's Court, or governing body, is meant to ensure the MPC takes full account of regional information.

Even so, the MPC's decision last week, ahead of Wednesday's new Inflation Report, not to reduce interest rates, disappointed manufacturers and unions.

The new article, written by three of the Bank's economists, says: "The forward-looking nature of many survey responses means they often provide information that is additional to official and other sources of data."

The Bank gets details of more than 30 surveys but places particular emphasis on the broadest of them. These include the balance of optimists over pessimists in the CBI's monthly survey of manufacturing and the quarterly BCC survey of services, which are related to annual GDP growth.

All the survey evidence, particularly that from the CBI, signalled falling confidence by the autumn. "Based on the previous observed relationship between the CBI series and GDP growth, the deterioration in survey balances in autumn 1998 could have been consistent with a sharp fall in GDP growth."

But as the relationship weakened, the MPC opted to forecast weaker but not negative growth, with the balance of risks pointing to an even weaker outlook.

A separate article describes the new daily effective exchange rate index for the euro being calculated by the Bank. It has created a daily series going back to January 1975. The pound has the greatest weight in the index, followed by the US dollar.