The former Conservative chancellor said that Bank officials and advisers should be removed from the membership of the MPC and replaced by people with experience of the "real economy". Mr Clarke also said that the committee should take into account jobs and growth as well as inflation when it was making crucial decisions on interest rates.
In evidence to the House of Lords Treasury Select Committee, he said that the overriding aim of economic policy should be steady, sustainable growth and that "everything else is subordinate".
In a scathing attack on the committee, Mr Clarke claimed that it had made itself look "completely ridiculous" last year when it increased rates at a time when the economy was heading for a soft landing.
Although the MPC had redeemed itself by cutting rates continuously in recent months, it was, he said, still "slavishly devoted" to "pretty useless" economic models drawn up by the Treasury in the Eighties that were irrelevant today.
To ensure genuine reform, the committee's membership should be widened to include up to eight outsiders such as industrialists, City businessmen and commentators with a "good feel for the markets", he said. There was "no reason whatever" for advisers and officials from the Bank of England to sit on the MPC, which should be reformed to resemble the US Federal Reserve or the Bundesbank.
The officials should still be allowed to feed advice to the committee, but should not sit on what is currently a "wholly bureaucratic structure".
"My criticism is that by their membership and approach, they detach themselves from what's happening in the real economy. As I tried to be a real economy chancellor, I think it's a very unreal Monetary Policy Committee we have," Mr Clarke said.
Echoing comments by leading trade unionists worried about the impact of high interest rates on industry, Mr Clarke said that the committee should have regard to the wider economy. He accepted that the dominant element in the remit of the MPC had to be price stability, but stressed that living standards, wealth creation and jobs should also be taken into account. "I think it should have a wide regard to what's happening in macroeconomic policy generally," he said.
Mr Clarke said he would have cut interest rates still further this month as he had a "gloomy outlook" of the world economy. "My sense is thatmore bad news is on the way and severe global slowdown is an imminent risk," he said.Reuse content