Monetary Policy Committee


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Monetary Policy Committee (MPC)

a body, part of the BANK OF ENGLAND, which was established on May 61997 when, in an unprecedented move, the government transferred responsibility for setting UK ‘official’ INTEREST RATES from itself to the Bank of England. This was part of a move to give MONETARY POLICY a more independent stance, free from political ‘interference’. The MPC currently has a membership of nine, five full-time Bank of England members including the Bank's Governor and Deputy Governor and four ‘independent’ members appointed from outside the Bank. The basic remit of the MPC is to set interest rates in order to secure the achievement of the government's INFLATION rate ‘target’ (RPIX) of, initially, a maximum of 2/2% per annum (now CPI – 2%). To this end the MPC meets monthly and after reviewing prevailing and anticipated economic conditions decides whether any interest rate change is necessary. (See INTEREST RATE entry Fig. 47 and text for details of interest rate changes since 1997). The MPC monitors a varied set of economic data and indices including retail sales of goods and services, (see RETAIL PRICE INDEX) house sales, the growth in GDP, changes in the M0 and M4 money supply figures and the growth of earnings to ‘gauge’ the extent of inflationary pressure in the economy, and then take a majority vote on whether or not an interest rate change is called for, and, if so, by what magnitude.
Monetary Policy Committee (MPC)click for a larger image
Fig. 125 Monetary Policy Committee (MPC). An increase in the ‘official’ interest rate by the MPC.

Monetary Policy Committee (MPC)

a body, part of the BANK OF ENGLAND, that was established in 1997 when, in an unprecedented move, the government transferred responsibility for setting UK ‘official’ INTEREST RATES from itself to the Bank of England. This was part of a move to give MONETARY POLICY a more independent stance, free from political ‘interference’. The MPC currently has a membership of nine: five full-time Bank of England members, including the Bank's Governor and Deputy Governor, and four ‘independent’ members appointed from outside the Bank. The basic remit of the MPC is to set interest rates in order to secure the achievement of the government's INFLATION rate ‘target’ of, currently, a maximum of no more than 2% per annum (as measured by the CONSUMER PRICE INDEX).

To this end, the MPC meets monthly and, after reviewing prevailing and anticipated economic conditions, decides whether any interest rate change is necessary. See Fig. 95 (INTEREST RATE entry). The MPC monitors a varied set of economic data and indices, including retail sales of goods and services (see RETAIL PRICE INDEX), house sales, the growth in GDP, changes in the M0 and M4 money supply figures and the growth of earnings to ‘gauge’ the extent of inflationary pressure in the economy, and then take a majority vote on whether or not an interest rate change is called for, and, if so, by what magnitude.

The MPC has set a ‘tolerance threshold’ for pay/earnings growth of no more than 41/2% as being compatible with low inflation (see COST-PUSH INFLATION). Additionally, it is now recognized that fiscal ‘prudence’ on the part of the government is necessary to achieve the inflation target. In the past, large budget deficits (PUBLIC SECTOR BORROWING REQUIREMENT) have led to excessive monetary creation and have fuelled runaway inflation. See FISCAL POLICY for further details.

The MPC may wish to dampen down inflationary tendencies by increasing interest rates. Technically, how is this achieved? Firstly, the MPC ‘announces’ an interest rate rise from, say, 5.75% to 6%. To make this new higher rate ‘stick’, the money supply needs to be reduced - shifting MS to MS1, in Fig. 125. This can be done in a number of ways:

  1. the Bank of England can engage in an ‘open-market operation’, selling bonds to the general public who pay for them by running down their current accounts with the commercial banks. This leads to an initial and then a multiple contraction of bank deposits - the main element in the M4 money supply;
  2. ‘funding’ could be undertaken, replacing maturing three-month Treasury bills (held as part of the bank's liquidity ratio) by longer-dated bonds;
  3. the Bank of England could reduce the number of Treasury bills supplied to the discount houses (and then on-lent to the banks) as they mature, while increasing the ‘repurchase’ interest rate chargeable (i.e. the so-called ‘repo’ rate) on new issues of bills. For further discussion see TRANSMISSION MECHANISM. See DISCOUNT MARKET, INTEREST RATE, TAYLOR RULE and main entry on MONETARY POLICY.
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