Politicians tell MPC to listen to the regions

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The Independent Online
THE BANK of England was yesterday criticised by MPs for failing to give the Monetary Policy Committee (MPC) information on the impact of interest rate rises on different regions and sectors of the UK economy.

The Treasury Select Committee, chaired by Giles Radice, ordered the members of the nine-strong MPC to get out of London and visit the regions to "hear the views of others".

It said it was "extremely likely" the rate hikes in the first six months of the MPC had contributed to the high level of the pound. It said the appreciation of sterling had caused an imbalance between the depressed export manufacturing sector and the booming services sector.

"We consider it surprising that no presentation of the differential effects of monetary policy on sectors of the economy and on the regions has been made by the Bank since the MPC was formed," it said.

"We would encourage members of the MPC to visit sectors of the economy and regions and nations of Britain to make themselves and their views better known and to hear the views of others."

The comments came in an otherwise laudatory assessment of the decision to hand over the job of setting rates to the MPC and of the committee's record. The MPs said the MPC had had "initial success" in controlling inflation and had created greater transparency and credibility in the operation of monetary policy.

They said it was too early to draw strong conclusions but said the Chancellor's decision had been "vindicated in the ... technical quality of the process of decision making". It pointed to gilt yields which have fallen close to the Government's inflation target of 2.5 per cent.

The MPC raised rates six times from 6 per cent to 7.5 per cent between mid-1997 and mid-1998 during which time sterling's effective exchange rate rose 10 per cent. "We believe it is extremely likely that the relatively high interest rates in the UK have had a part in underpinning the strength of sterling," it added. "We agree with the Bank that a weaker exchange rate would ease the problem of sectoral imbalance."

It said current conditions in world markets made a stable pound hard to achieve. But it said the swift response to last year's global financial crisis had helped to ward off a recession. The MPC has since cut rates sharply to a 22-year low of 5 per cent. "Witnesses told us that survey evidence of the type seen in the second half of 1998 had in the past always been a strong indicator of an economic recession," it said.

"In the light of this, the actions of the MPC have helped to stave off recession."