1. The Bank of England’s Monetary Policy Independence: The First ten Years Alec Chrystal Professor of Money and Banking Head of the Faculty of Finance, Cass Business School

2. Outline of Talk UK monetary policy has been delegated to the MPC of the Bank of England for a decade. The policy outcome have been excellent, but is this due to good decisions by the MPC? In part, probably, but it cannot all be down to MPC as outcomes have been similar in many other countries. AND it is likely that most of the gains have come from regime credibility rather than from the policy decisions themselves. Actual policy decisions are unlikely to have had much impact on the economy. The anchoring of inflation expectations has done most of the work. Finally we discuss what could go wrong and what steps are needed to guarantee that credibility is maintained in future.

3. The end of macroeconomics? The outcomes discussed are relevant to several long running debates in macroeconomics: Optimal stabilisation policy Rules versus discretion Credibility and time inconsistency Political business cycles Monetary targets etc Central bank independence The recent institutional design has benefited from all these debates and the policy successes have almost certainly killed them stone dead.

17. The Monetary Policy Committee (MPC) The MPC has 9 members Five are internal to the bank: The Governor, two deputy governors, the director of market operations, and the chief economist. Four are externals appointed for three year terms: currently two academics, and two ex-private sector economists. Each has one vote and the Governor has the casting vote in the event of a tie. Each is personally accountable for his or her own decisions to Parliament.

18. How interest rates are set Until the end of 2003, MPC set interest rates to meet the 2.5% RPIX inflation target set by the Chancellor. RPIX = RPI minus impact of interest rates (via mortgages etc) Now the target is 2.0% inflation of the CPI index (which used to be called HICP) MPC takes rate decision each month and has one day of data briefing and two days of analysis. They meet more often during the quarterly forecast round. Announcement at noon on 1st Thursday of each month. Inflation Report and new forecast every 3 months. Minutes published two weeks after meeting. Votes are published with minutes. The target is symmetrical and the Governor has to write an open letter to the Chancellor if inflation is >1% above or below target explaining why and what will be done about it.

19. What interest rate is set and how is it done? Until May 2006, the rate set was the rate on two week “repo”. REPO = sale and repurchase agreement. Bank of England would only lend to money markets on a secured basis and only deal with acceptable counter- parties. Since May 2006 the Bank pays interest on commercial banks’ deposits at the Central Bank. The “official bank rate” is this interest rate. There is a rate above this at which banks can borrow from the Bank of England.

20. What factors influence decisions? Key influence is balance of AD relative to AS AD is made up of private consumption, investment, government consumption and the balance of trade (C+I+G+X-IM) AS depends in long-run on trend growth in capacity (potential GDP). In short run, trends in wages, and other input costs are relevant, as are forward looking surveys. They are briefed on: the world economy, monetary developments, labour market, macro data (C, I, G, X, IM), prices, market information. The Bank publishes every three months a “fan chart” “projection” of inflation and GDP growth. The Bank’s forecasting model is published. You can watch Press conference on web cast.

21. Inflation and GDP growth projections The MPC make a policy decision in light of alternative projections and only publish the ones consistent with policy decision. Up to August 2004 projections assumed constant policy rate (so they were not true forecasts). Since August 2004 projections assume market-based forward interest rates after the current period. MPC targets inflation two years ahead and projections used to go up to 2 years ahead but since August 2004 they project to a 3 year horizon. Virtually all inflation projections are on target at the two year horizon. NOTE: Inflation date are never revised but GDP data are subject to substantial revisions.

22. May 1997 Inflation Report

23. August 1997 Inflation Report

24. November 1997 Inflation Report

25. February 1998 Inflation Report

26. May 1998 Inflation Report

27. August 1998 Inflation Report

28. November 1998 Inflation Report

29. February 1999 Inflation Report

30. May 1999 Inflation Report

31. August 1999 Inflation Report

32. November 1999 Inflation Report

33. February 2000 Inflation Report

34. May 2000 Inflation Report

35. August 2000 Inflation Report

36. November 2000 Inflation Report

37. February 2001 Inflation Report

38. May 2001 Inflation Report

39. August 2001 Inflation Report

40. November 2001 Inflation Report

41. February 2002 Inflation Report

42. May 2002 Inflation Report

43. UK RPIX inflation. August 2002 Inflation Report Source: August Inflation Report 2002

44. November 2002 Inflation report

45. February 2003 Inflation Report

46. May 2003 Inflation Report

47. August 2003 Inflation Report

48. November 2003 Inflation Report

49. February 2004 Inflation Report

50. CPI projection, February 2004 Inflation Report

51. CPI projection, May 2004 Inflation Report

52. CPI projection, August 2004 Inflation Report

53. CPI projection November 2004 Inflation Report

54. CPI Inflation, February 2005 Inflation report

55. CPI Inflation, May 2005 Inflation Report

56. CPI Inflation, August 2005 Inflation Report

57. CPI Inflation, November 2005 Inflation Report

58. CPI Inflation, February 2006 Inflation Report

59. CPI Inflation, May 2006 Inflation Report

60. CPI Inflation, August 2006 Inflation Report

61. CPI Inflation, Nov 2006 Inflation Report

62. CPI Inflation, Feb 2007 Inflation Report

63. CPI Inflation, May 2007 Inflation Report

64. GDP projection, November 1997 Inflation Report

65. GDP projection, February 1998 Inflation Report

66. GDP projection, May 1998 Inflation Report

67. GDP projection, August 1998 Inflation Report

68. GDP projection, November 1998 Inflation Report

69. GDP projection, February 1999 Inflation Report

70. GDP projection, May 1999 Inflation Report

71. GDP projection, August 1999 Inflation Report

72. GDP projection, November 1999 Inflation Report

73. GDP projection, February 2000 Inflation Report

74. GDP projection, May 2000 Inflation Report

75. GDP projection, August 2000 Inflation Report

76. GDP projection, November 2000 Inflation Report

77. GDP projection, February 2001 Inflation Report

78. GDP projection, May 2001 Inflation Report

79. GDP projection, August 2001 Inflation Report

80. GDP projection, November 2001 Inflation Report

81. GDP projection, February 2002 Inflation Report

82. GDP projection, May 2002 Inflation Report

83. UK GDP growth. Actual to 2002Q1 and projected to 2004Q2 Source: August Inflation Report 2002

84. UK GDP Growth: November 2002 Inflation Report

85. UK GDP Growth: February 2003 Inflation Report

86. GDP Growth: May 2003 Inflation Report

87. GDP Growth: August 2003 Inflation Report

88. UK GDP Growth: November 2003 Inflation Report

89. UK GDP Growth: February 2004 Inflation Report

90. UK GDP Growth: May 2004 Inflation Report

91. GDP Growth: August 2004 Inflation Report

92. UK GDP Growth: November 2004 Inflation Report

93. UK GDP Growth: February 2005 Inflation Report

94. UK GDP Growth: May 2005 Inflation Report

95. UK GDP Growth: August 2005 Inflation Report

96. UK GDP Growth: November 2005 Inflation Report

97. UK GDP Growth: February 2006 Inflation Report

98. UK GDP Growth: May 2006 Inflation Report

99. UK GDP Growth: August 2006 Inflation Report

100. UK GDP Growth: Nov 2006 Inflation Report

101. UK GDP Growth: Feb 2007 Inflation Report

102. UK GDP Growth: May 2007 Inflation Report

103. Some Issues The inflation target has established itself as a strong “attractor”. Letter writing in only one month in the past decade is an amazing outcome. However, credibility would be hard to restore if it were ever lost……and interest rates could become much more volatile. One constant in the current regime has been Mervyn King. When he retires, a “political” appointment to Governor could easily destroy hard won credibility. Fiscal policy restraint is also essential, as the MPC would be in a difficult position, if in the face of high public sector demand, it had to raise interest rates substantially to lower private sector demand. It is essential that MPC continues to have a strong core of technically competent economists. The public appointment process to be introduced may help here, but the drafting of the “essential skills” for the job will be very important.