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

2. Types of autonomy 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 Independence (1)

3. Recent UK Monetary Policy History 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] Independence (2)

4. Objectives In relation to monetary policy, the objectives of the Bank are: a)to maintain price stability; and b)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) Independence (3 )

5. Core Purpose 1 Monetary Stability Monetary Stability means stable prices and confidence in the currency. Stable prices are defined by the Government’s 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.) Independence(4)

6. Core Purpose 2 Financial Stability Financial Stability entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank’s 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.) Independence (5)

7. Monetary Policy Committee 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 by the Crown ) for 5 years ) ) 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 Independence (6)

8. Target for Price Stability 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. Independence (7)

9. 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 Transparency

10. Court of Directors 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 Accountability (1)

11. Accountability to… Government --- MPC appointments --- Treasury observer at MPC meetings --- Annual remit / possible Governor’s letter Legislature --- Select Committee hearings Public --- Minutes / Inflation Report / Speeches Accountability (2)