INDEPENDENCE,TRANSPARENCY AND ACCOUNTABILITY IN MONETARY POLICYMAKING:

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• INDEPENDENCE,TRANSPARENCY AND ACCOUNTABILITY IN
  MONETARY POLICY-MAKING
• THE CASE OF THE BANK OF ENGLAND
• STEPHEN P COLLINS
• BANK OF ENGLAND

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Types of autonomy
Independence (1)

• Goal autonomy, eg US Fed- Congress sets
  parameters
• - Central bank selects target
• Target autonomy, eg ECB- Government selects
  goal
• - Central bank sets target
• Instrument autonomy, eg UK- Government selects
  goal and sets target- Central bank decides how
  to attain target

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Recent UK Monetary Policy History
Independence (2)
1970s 1980s 1990-92 1992-97 1997
Various monetary targets Membership of Exchange
Rate Mechanism (exchange rate target) Inflation
target (interest rate decisions made by
Chancellor of the Exchequer after discussion with
the Governor) Inflation target Bank of England
(Monetary Policy Committee) makes interest rate
decisions
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Objectives
Independence (3)

• In relation to monetary policy, the objectives of
  the Bank are
• to maintain price stability and
• subject to that, to support the economic policy
  of the Government, including its objectives for
  growth and employment
• (This is enshrined in the Bank of England Act,
  1998)

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Core Purpose 1Monetary Stability
Independence(4)
Monetary Stability means stable prices and
confidence in the currency. Stable prices are
defined by the Governments inflation target,
which the Bank seeks to meet through the
decisions on interest rates taken by the Monetary
Policy Committee, explaining those decisions
transparently and implementing them effectively
in the money markets. (This is enshrined in the
Bank of England Act, 1998.)
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Core Purpose 2 Financial Stability
Independence (5)
Financial Stability entails detecting and
reducing threats to the financial system as a
whole. Such threats are detected through the
Banks surveillance and market intelligence
functions. They are reduced by strengthening
infrastructure, and by financial and other
operations, at home and abroad, including, in
exceptional circumstances, by acting as the
lender of last resort. (This is enshrined in a
Memorandum of Understanding between HM Treasury,
the Bank of England, and the Financial Services
Authority.)
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Monetary Policy Committee
Independence (6)
) Appointed by the Crown) for 5 years)
5 Internal Members 4 External Members
Governor Deputy Governor for Monetary
Policy Deputy Governor for Financial
Stability Executive Director for Monetary
Analysis (Chief Economist) Executive Director
for Markets/Monetary Policy
Operations Can be full-time or part-time Can
only do other jobs that do not pose a
conflict of interest
) Appointed for ) 3 years by the) Governor
after) consultation with the) Chancellor of
the) Exchequer
) Appointed for 3 years ) by the Chancellor of
) the Exchequer
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Target for Price Stability
Independence (7)
Was 2½ for RPI excluding mortgage interest
payments (RPIX) Is now 2 for Consumer Prices
Index (CPI) Harmonised Index of Consumer
Prices (HICP) Set each year by the Chancellor
of the Exchequer If inflation moves away from
the target by more than 1 in either direction,
the Governor is required to send the Chancellor
an open letter explaining why, and setting out
what the Bank proposes to do to ensure that
inflation comes back to target.
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Transparency
Transparency
Minutes of MPC meetings published two weeks after
each meeting. Individual votes are shown, but
not individual statements/positions. Inflation
report published quarterly.Shows inflation
forecast up to three years ahead based on market
and unchanged interest rates. Parliamentary
hearings Governor and MPC members appear before
Select Committee on the Treasury
quarterly Speeches Given by all members of MPC
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Court of Directors
Accountability (1)
The Court of Directors consists of the Governor,
both Deputy Governors and 16 non-executive
Directors. There is a Sub-Committee of Court
(NedCo) consisting of all the non-executive
Directors, with a chairman designated by the
Chancellor of the Exchequer Among its
responsibilities, NedCo is responsible for
reviewing the procedures of the MPC, in
particular whether the Committee has collected
the regional, sectoral and other information
necessary for the purposes of formulating
monetary policy
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Accountability to
Accountability (2)

• Government
• --- MPC appointments
• --- Treasury observer at MPC meetings
• --- Annual remit / possible Governors letter
• Legislature
• --- Select Committee hearings
• Public
• --- Minutes / Inflation Report / Speeches