00.01 THURSDAY 11 NOVEMBER 2004


The work of the Bank of England's independent Monetary Policy Committee (MPC) comes under the microscope in a new report by the House of Lords Economic Affairs Committee. The Committee also examines, for the first time, the UK's fiscal policy framework.

The Chairman of the Committee, Lord Peston, said:

"The MPC is a real success story. But there are a number of steps that should be taken, by the Chancellor and by the MPC itself, to strengthen it further."

"On fiscal policy, we think that the present policy framework is close to best practice and that the Chancellor's golden rule is a useful rule-of-thumb."

"However, the persistence of inflation below target and the continued apparent absence of strong demand factors in inflation are evidence that interest rates have been kept too high."

Other conclusions of the Committee:

  • The Treasury should clarify its decision to change the MPC's operational inflation target from 2.5 % measured by RPIX (the Retail Prices Index) to 2 % measured by the Consumer Price Index (CPI). The Committee was not convinced this change was fully thought through and believe it may be of greater significance than has been recognised.

  • The Treasury should also monitor the effect of the change on the labour market, and explain which of the two indices (RPIX and CPI) should influence future wage demands, particularly as the gap between the indices may widen.

  • The Committee would not put the same emphasis on house price inflation, as do the MPC - who should clarify their position on this.

  • The Chancellor should revert to his previous practice of appointing external members of the MPC with acknowledged expertise in monetary economics.

  • The MPC's forecasting record reveals systematic and persistent errors. It is remarkable that the MPC consistently over-predicted inflation until 2002, and after that consistently under-predicted it.

  • The Bank of England should make its economic model accessible to the public.

  • The Committee do not consider the UK current account deficit an immediate problem, but have some concerns about the trade deficit.


1. The members of the House of Lords  Economic Affairs Committee which conducted this inquiry were:

Lord Barnett

Lord Elder

Lord Goodhart

Lord Marsh

Lord Oakeshott of Seagrove Bay

Baroness O'Cathain

Lord Peston (Chairman)

Lord Roll of Ipsden

Lord Sheldon

Lord Sheppard of Didgemere

Lord Skidelsky

Lord Vinson

Lord Wakeham

2. The report is published by the Stationery Office: Monetary and Fiscal Policy: Present Successes and Future Problems, House of Lords Economic Affairs Committee, 3rd Report, Session 2003-04, HL Paper 176-I, ISBN 0 10 400549 1, price £11.50.

3. In 1998 the House of Lords established the Select Committee on the Monetary Policy Committee (MPC) of the Bank of England to provide a mechanism for parliamentary scrutiny of the work of the MPC. In early 2001 its successor, the Economic Affairs Committee, was established with a remit "to consider economic affairs". Given that broad remit, the Committee has decided to continue its scrutiny of current economic policy and the role and performance of the MPC in particular.

Further information from:

Robert Graham-Harrison

Clerk of the Committee, on 020 7219 5208

Copies of the report and requests for interviews with Lord Peston from:

Jillian Bailey

Press and Publicity Officer (Committees), on 020 7219 8659