Monetary Policy Committee

– in the House of Lords at 2:30 pm on 8 November 2005.

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Photo of Lord Barnett Lord Barnett Labour 2:30, 8 November 2005

asked Her Majesty's Government:

What criteria are used for the appointment of external members of the Monetary Policy Committee of the Bank of England.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, Section 13(4) of the Bank of England Act 1998 states that the four external members of the Monetary Policy Committee shall be appointed by the Chancellor only if he is satisfied that the person has knowledge or experience which is likely to be relevant to the committee's functions.

Photo of Lord Barnett Lord Barnett Labour

My Lords, I assume that that means that the Chancellor must like him or her. In making the decision, does the Chancellor have discussions with the Governor of the Bank of England? If so, what do they talk about? Does he try to influence whether the person is one who might increase or decrease interest rates? If he does not discuss that, can we take it that they discuss something at their regular monthly meetings? If they do not discuss that, is it because the Chancellor never seeks in any way to influence the changes in interest rates decided by the Monetary Policy Committee?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I am not privy to what happens at monthly meetings between the Governor of the Bank of England and the Chancellor. I am a little surprised that my noble friend should be perhaps a little disgruntled at the arrangements surrounding the Monetary Policy Committee, because independence of the Bank of England and the institutional arrangements have been spectacularly successful in helping to guide the UK economy. As for the Chancellor influencing the committee's composition and the outcome of its decisions, I firmly reject that. It is hugely important to the process that the credibility and integrity of the MPC is maintained. That has been recognised internationally by the OECD and others.

Photo of Lord Newby Lord Newby Spokesperson in the Lords, Treasury

My Lords, does the Minister agree that the openness of the system would be improved if the Chancellor fulfilled the Nolan principles when making appointments to the MPC—in particular, if the appointments were advertised? The problem at the moment is that the Chancellor often gives the impression, even if it is not the reality, that he just rings up a chum.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, if that impression is given, it does not accord with reality. The difficulty in making these appointments is that they are highly market-sensitive and the procedures adopted for other public appointments are therefore not appropriate in this case. Imagine what might happen if a timetable were issued with a process of advertisement. There would be endless speculation about who is in, who is out; who has applied and who has not; is it the doves or the hawks? There is no doubt that that would feed into the market. It is vital that market interest rates should reflect economic fundamentals, not rumour, speculation and perception.

Photo of Baroness Noakes Baroness Noakes Spokespersons In the Lords, Treasury, Spokespersons In the Lords, Work & Pensions & Welfare Reform

My Lords, we on these Benches understand why the appointment of the Governor of the Bank of England might be market sensitive, but we do not understand why the appointment of any of the other eight members of the MPC might be market sensitive. What evidence does the Treasury have to suggest that these appointments have the power to move markets?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I do not have the cuttings with me, but recent press reports relating only to a change itself gave rise to speculation about what had been happening between the so-called doves and hawks on the Monetary Policy Committee. These things do influence markets. It may be inevitable that one can never extinguish that entirely, but taking steps to ensure that it is not exacerbated by the appointments process is absolutely vital.

Photo of Lord Peston Lord Peston Labour

My Lords, I chaired the Economic Affairs Committee, which vigorously opposed the Treasury's approach to this matter and argued forcefully that we ought to follow the Nolan rules. Indeed, we believed that the Treasury, as the most important department of state, ought to have given a lead on this. What is it about the availability of economists in this country that the Treasury is under the impression that only those from the Oxford, Cambridge and London nexus are worthy to be members of the Monetary Policy Committee? Does my noble friend not know that there are vast numbers of first-class universities in this country containing outstandingly good economists? I live for the day when someone from north of the south-east triangle might be appointed to that committee.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I am sure that the Government recognise, as do I, that there are many distinguished economists in the UK, including my noble friend. What is important is that those who are appointed have the relevant expertise. This matter is tested because the Treasury Select Committee in another place has held some 22 appointment hearings since 1998. On each occasion it has endorsed the appointments that have been made, with only one exception back in 2000 where a query arose. Indeed, the decisions of the Treasury Select Committee in another place have been unanimous. They have had all-party support.

Photo of Lord McNally Lord McNally Leader In the House of Lords, Leader, House of Lords, Liberal Democrat Leader in the House of Lords

My Lords, in view of what the Minister said about the qualifications needed, including the suggestion that someone from north of Watford be appointed, does not the name Lord Barnett cry out? I suggest this particularly if we couple with his qualifications the noble Lord's record of tabling unswervingly helpful Questions to the Government Front Bench.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the experience and expertise of my noble friend Lord Barnett are well recognised beyond the bounds of the Treasury and the Bank of England. However, like the noble Lord, Lord McNally, I would be distraught if my noble friend took up a post which precluded him being able to be regularly in his place in order to ask such interesting questions.

Photo of Lord Roberts of Conwy Lord Roberts of Conwy Spokespersons In the Lords, Wales

My Lords, are any reports on these appointees given to the Chancellor after their appointment, and if so, by whom?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the Chancellor is directly involved in making the appointments of external members, but the names of the people who are considered for appointment remain confidential for reasons which noble Lords will understand. However, I repeat that those who are appointed are routinely questioned by the Treasury Select Committee in another place.

Photo of Lord Sheldon Lord Sheldon Labour

My Lords, should not the Governor be congratulated on his ability to be in the minority during the monthly meeting when interest rates are assessed, and to be able to take that position when it might be thought of as a disadvantage? It demonstrates clearly the level of independence that the Governor has brought to his office.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, that is absolutely right, although I think it has happened on only one occasion, certainly on checking the voting records over the past 12 months. Indeed, when we look at both the external and internal appointments, it is clear that the members do not vote in blocks in the same way. They vote differentially and have done so over the period.

In relation to the whole question here, I would ultimately pray in aid the report of the OECD Economic Survey. It states:

"The framework governing monetary policy and fiscal policy has played a key role in improving macroeconomic stability relative both to the past and to other OECD countries. The United Kingdom is a leader in the quality of its monetary and fiscal policy frameworks among OECD countries and the principles and features of its framework have been scrutinised by other countries with a view to implementation in a different institutional context".