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.