Yesterday I heard the story of the Monetary Policy Committee at a meeting where we were told we should not quote the source. I am pleased to say it was just the same as the story you can read on their website or hear in the public media. I will draw on the public materials.
Thinking again about it all, I was struck forcefully by the question what is the point of it? What can the MPC do that the Chancellor and Governor cannot do, as they used to without an MPC? Interest rates have stayed at 0.5% for more than 5 years. Quantitative easing is now in the past, and anyway needs Chancellor’s approval. The Committee has leant over backwards to say they are most unlikely to raise interest rates for the next two years. Nine people solemnly read and think a lot, discuss at some length, and conclude each month to keep rates on hold.
Inflation has averaged around 3.5% compared to the 2% target. The MPC tells us inflation was higher because the devaluation of sterling had a big impact on import costs, because oil and energy prices rose, and because commodity prices generally did go up a lot in the period, though have since come down. The MPC would only be concerned about higher inflation if it came from “domestic pressures” like wages, where increases have stayed low.
The MPC recognsies predicting international commodity and oil prices is very difficult. They just use market futures prices, which of course shift around a lot. They have produced a series of forecasts of the UK economic future over the years of their existence that have not excelled compared to the forecasts of many private sector commentators. They duplicate the work of the Office of Budget Responsibility, who also use public money to produce forecasts, often similar to the Bank’s.
During the crisis the old MPC did badly. It kept rates too low for too long to help the boom. It then kept them too high for too long to ensure the bust, as I complained at the time. Now it has created a lot of new money to make up for the weak banks it helped weaken. It has not hit its inflation target for a long time.
I wish today’s MPC well. It seems more balanced than the MPC that cheered the boom on, or the MPC which gloomily assisted in the crash. Maybe we want it to do nothing elegantly for a bit. These are early days for the recovery. Monetary activism in the form of printing more money could trigger more inflation which we don’t want. A rush to push up interest rates could throttle the recovery.
The markets have their own way of doing these things. They are putting up market interest rates anyay. The MPC does not seem to have a plan to make the markets do what the MPC wants.
So do we need both Bank and OBR economic forecasts? How much more value does an MPC of nine expensive people provide rather than one of say 5? As most agree we need the good bits of the public sector to do more with less, and other bits of the public sector to do less with less, could we find a few savings here as MPC members reach the end of their terms?