Home > Monetary Policy > Tragic Failure of the Treasury Select Committee

Tragic Failure of the Treasury Select Committee

The Bank of England’s Monetary Policy Committee was given power to steer the nominal economy in 1997 by the new Labour government.  They are given a moderately flexible legal mandate by the Chancellor: maintain price stability as defined by a 2% CPI rate, and subject to that, avoid unnecessarily volatility in output.  The MPC is legally accountable to Parliament, and are required to report regularly to the (cross-party) Treasury Select Committee every quarter.

In practice, the MPC have followed a “inflation forecast-targeting” model whereby they set their instruments (usually the short term interest rate, Bank Rate; more recently, the size of the balance sheet) such as to ensure their forecast for inflation looking two or three years out is around 2%.  They did this very successfully up to 2008, and more recently they have done it very badly, persistently targeting sub-2% inflation.  Under this forecast-targeting model, we have most of the information we need to hold the MPC accountable; the Bank should be commended for their commitment to transparency, one area in which they score well in an international comparison.

The MPC could and should go further on the transparency front, publishing their estimate of the “output gap”, and/or potential real GDP; they obviously have such estimates since they are paramount in their decision-making.  When the Bank’s Chief Economist says he wants to “get inflation down” he does so because he has an absurdly pessimistic view of the potential output.

This should be a matter of great concern to Parliament, and in particular, to the Treasury Select Committee.  (That we have a union chief sit on the Bank of England’s Court of Directors who does not complain loudly about the disastrous effects of the Bank’s low estimate of potential output is a mystery to me.)

So the fact that the Treasury Select Committee have launched an inquiry into the practice of UK monetary policy would be welcome.  Except that they have chosen to investigate… “the distributional effects of Quantitative Easing“.

Imagine that a cruise ship hits an iceberg and sinks; many of the passengers die.  The committee responsible for health and safety at the ship owner decides to investigate.  They concentrate on whether the ship had the right number of deck chairs.

What a tragedy.  The MPC are failing.  When the MPC fails, the people of the UK suffer; they cannot work, they cannot prosper.  When the MPC fails, governments fall.  And Parliament sits idle, counting deck chairs.

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Categories: Monetary Policy
  1. October 12, 2012 at 11:07

    This doesn’t really go to your main point, but one small thing on the MPC’s forecasts. They don’t condition them on their view of optimal policy, they condition them on the market yield curve. So when they publish forecasts with inflation below 2%, they’re signalling that the market doesn’t realise how loose policy is going to be. They’re not signalling that they want inflation to be less than 2%.

    • October 12, 2012 at 11:43

      Hi, yes this is a really interesting point, I’ve been meaning to post on this, Posen’s speech at Jackson Hole talked a lot about the forward guidance issue. I have been wondering: are there any central banks which have not used forward guidance after hitting the zero bound other than the BoJ and BoE? The Riksbank, Bank of Canada and the Fed have all deployed forward guidance for future interest rates. The SNB’s euro peg is a form of forward guidance too, I suppose.

      There is a reasonable argument for that view, “the market doesn’t realise how loose policy is going to be. I would say two things:

      a) the BoE think QE affects the economy with a lag. So the expected effects of QE must be a part of their internal forecasting model. (I can’t see how that could *not* be true. “Yes, we’re doing lots of QE, but we don’t expect it to have any effect on inflation” would obviously be nonsense)

      b) I have never heard an MPC member express that view. “Yes, the market is expecting us to miss our target, but that’s because the market is totally wrong about future interest rates”. Unless I missed that? When King talks about the forecast in the IR conference, he talks very clearly as if he is setting policy to hit the forecast, and the forecast they really use is the one conditioned on the market yield curve.

      • October 12, 2012 at 12:05

        I’m not really close enough to this, but I think they condition on the current amount of QE too (they must say this in the inflation report somewhere). So a below target forecast signals more QE to come.

        I cant say i listen to King’s press conf, but the brokers do seem to interpret the message in this way. The yield curve usually falls if they publish a below target forecast. So it is forward guidance of a kind, just not very explicit.

  2. November 10, 2012 at 12:02

    The only thing the Bank of England and MPC care about is lining the pockets of the B of E Pension Scheme whilst wrecking every other pension fund and pensioners lives and ensuring the RICH Families that own the Bank of England get richer still

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