Embargo: 00:01 Monday 18 December 2006
Contact: Owen Williams 020 7219 8659
OVER OPTIMISTIC TREASURY GROWTH PREDICTIONS ARE LIMITING EFFECTIVENESS OF INTEREST RATE DECISIONS
The House of Lords Economic Affairs Committee has today warned that 'consistently over-optimistic' GDP growth forecasts issued by The Treasury have been unhelpful to the Monetary Policy Committee in effectively managing monitory policy and setting interest rates.
In their report,
The Current State of Monetary Policy, the Committee, which includes two former Chancellors, state that over-optimistic Treasury growth forecasts over the last 5 years have led to under estimates of the expansionary stance of fiscal policy.
When these unrealistic forecasts have been revised downwards the UK's budgetary position has been shown to have deteriorated. The Committee argue that this has been unhelpful in setting interest rates and may have contributed to increases in interest rates when the true picture became clear.
The Committee consider the effects of house prices on inflation. They point out that the relationship between rising house prices and general inflation is not well understood. In his evidence Mervyn King told the Committee that while the MPC consider house prices when assessing the outlook for inflation they do not try to influence them. The Committee recommend that the Bank of England undertake extensive research on the link between house prices and consumer spending to establish a better understanding of the issue and to ensure the decisions of the MPC are made with the best available knowledge.
The Committee also raise concerns about the system of appointments to the MPC. They argue that the process, with new members appointed solely by the Chancellor, is shrouded in mystery and may not always recommend the most suitable candidates. They point out that increasingly new members lack prior expertise in monetary economics. The Committee argue that the term of service for external members of the MPC should be increased from 3 to 5 years to give new members enough time to establish expertise in monetary economics. They also assert that the selection process should have far greater transparency.
Commenting Lord Wakeham, Chairman of the Committee, said:
"We congratulate the Bank of England and the MPC for continuing to conduct monetary policy with considerable success.
"However there are several areas were we feel their task is being made even more difficult than it need be. The over-optimistic predictions for growth that have consistently been produced by The Treasury have masked the true deficit of the UK's budgetary position and made it extremely hard to make accurate judgments about interest rates. The Treasury should make every effort to be accurate in its growth predictions, something that has not always been the case in the past.
"We also feel that the process of appointing external members of the MPC should be changed. It needs to be far more open and transparent, at the moment it is shrouded in secrecy. Members should also serve for 5 years instead of 3 to ensure they can develop a detailed knowledge of monetary economics, something that is essential in the decisions they have to make."
Notes to Editors
1. The report is published by The Stationery Office:
The Current State of Monetary Policy, House of Lords Economic Affairs Committee, 1st Report of 2006/07, HL Paper 14
2. The report will be available shortly after publication at:
3. The members of the Committee who conducted the inquiry are:
Lord Wakeham (Chairman)
Lord Lamont of Lerwick
Lord Lawson of Blaby
Lord Macdonald of Tradeston
Lord MacLaurin of Knebworth
Lord Oakeshott of Seagrove Bay
Lord Powell of Bayswater
Lord Sheppard of Didgemere
Lord Turner of Ecchinswell
Lord Valance of Temmel
For copies of the report or to request and interview with Lord Wakeham, please call Owen Williams, Committee Press Officer on 0207 219 8659.