Why the Monetary Policy Committee must learn the importance of being boring

THE MPC boat has been well and truly rocked by the committee's independent members. Any of them who were not aware before this past weekend of the value of the central banker's dull, grey image should certainly have a new understanding of it now. Being boring is half the battle in establishing the credibility of monetary policy. For, given the inflation target, it is a technical problem best left to competent technocrats.

Of course, economists generally do well on the dullness front but rather badly when it comes to consensus. They are a famously argumentative lot. So it should perhaps not have come as a surprise that, now the interest rate-setting process has had time to settle, there has been a row over the allocation of the Bank's too-scarce resources for monetary analysis.

It is a row that is in one sense easy to resolve. The independent members should certainly be able to commission research without the say-so of the internal members, and if that means hiring some additional dedicated economists then the Court of the Bank of England should allocate them a budget for it. It would probably be impossible ever to completely offset the advantage of the home team, but then the four external members have actually played a big role in setting the terms of the MPC's debate so far, even with their less-than-adequate access to research resources.

The eruption of the dispute should also, at last, convince everybody how ludicrous it is to argue that the MPC should include representatives of industry, unions or the regions. If the four pointy-heads who are currently external members feel at such a disadvantage in the debate, how on earth would the pillar of the local Chamber of Commerce or chairman of a regional development agency fare if they disagreed with the collective wisdom of the Bank of England's 130 economists?

Unfortunately, fierce rows that spill over into the newspapers do not do a lot to bolster the impression of the MPC's quiet technical competence, and this is the harder part of the problem it now has to solve. The more so as that competence was also questioned in last week's quarterly report from the National Institute of Economic and Social Research. Andrew Blake and Garry Young used the Institute's model of the economy to look at how different growth and inflation would have been if interest rates had been constant at 6 per cent since May 1997 rather than climbing to 7.5 per cent in mid-1998 and falling to 5 per cent this past summer.

The answer is that there would have been almost no difference at all. But it is wrong to draw the apparently obvious conclusion that the MPC should therefore have been seriously inactive because the outcome would have been roughly the same - if anything fractionally higher growth with little extra inflation. For one thing, the Niesr simulation is just a thought-experiment - it is daft to imagine that a constant rate policy would have been acceptable in practice during a period which saw windfall gains to consumers give way to the Asian financial crisis.

More important, the fact that interest rates could have been up to one and a half percentage points lower or higher than they were in practice without having any significant impact at all on the economy tells us two crucial things. One is that monetary policy must have been about right. If there had been big policy errors, it would certainly have made a noticeable difference to the outcome.

The second point is that the response of output and prices to interest rates is neither swift nor easily predictable. Perhaps a difference of 1 per cent in the level of borrowing costs will have a big impact five years on, but it certainly does not within the two-year forecast horizon. And even if the difference did turn out to matter more in the longer term, we have no idea what the effects might be. The economy is so complex - and changing constantly with it - that no model can predict reliably that far in advance.

The moral is that we should all keep the power of monetary policy in perspective. Getting it broadly right matters, but being wrong by a quarter or half a point does not. It will be especially important to take this broad brush view this week, when the MPC has to decide whether or not to raise rates again. It probably ought to do so - the economy has accelerated through its trend growth rate, the tight jobs market is starting to push up pay deals and spending power is now showing up in frothy areas like the housing market. This is as convincing as early warning signals ever get.

On the other hand (as an economist would say), actual inflation is low and there is also the knotty "new paradigm" question. It is entirely plausible that technical and competitive developments have made it much harder for many prices to rise - but the scale of the phenomenon is unclear.

A decision to raise rates this week, while expected by the City, will be all the more controversial because the members of the MPC have fallen out. The usual critics will have additional ammunition to lob at the committee's hawks, and will do so gleefully. Still, there is some comfort in the fact that the microscope of policy debate has focussed on a row over what research gets done in Threadneedle Street - if there had been real mistakes, it could have been something a lot more serious.

d.coyle@independent.co.uk

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
PROMOTED VIDEO
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Extras
indybest
Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
art
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
News
ebooksAn unforgettable anthology of contemporary reportage
News
Wilko Johnson is currently on his farewell tour
people
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Life and Style
CHARGE BOOSTER: Aeroplane mode doesn't sound very exciting, but it can be a (phone) hacker's friend. Turning on the option while charging your mobile will increase the speed at which your phone battery charges
techNew book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
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

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?