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BRIEFING PAPER Number 7289, 7 September 2015

Improvements to Monetary Policy Committee transparency

By Dominic Webb

Inside: 1. Background 2. Simultaneous publication of

MPC decision, minutes and Inflation Report

3. Reduction in number of MPC meetings from 12 to 8 a year

4. Transcripts of MPC meetings

Number 7289, 7 September 2015 2

Contents Summary 3

1. Background 4 1.1 Introduction 4 1.2 The Warsh Review 5

2. Simultaneous publication of MPC decision, minutes and Inflation Report 7

3. Reduction in number of MPC meetings from 12 to 8 a year 9

4. Transcripts of MPC meetings 12

Cover page image copyright: Threadneedle Street, City of London by Keith Braithwaite. Licensed under CC BY 2.0 / image cropped.

3 Improvements to Monetary Policy Committee transparency

Summary This note examines changes being made to the Bank of England’s Monetary Policy Committee (MPC). These are designed to increase its transparency and accountability. They are part of a wider programme of reform to the Bank which now has greater responsibility for the UK financial system as a whole, as well as its monetary policy duties.

The changes follow a review into the transparency of monetary policy carried out for the Bank by Kevin Warsh, a former member of the Board of Governors of the US Federal Reserve. The Warsh Review made a number of recommendations. These were accepted by the Bank. Some have already been implemented. Others will require legislation. The Government will introduce a Bank of England Bill to implement some of the recommendations.1 The Bill will also cover a number of matters not related to the MPC, including reforms to the Bank’s Court of Directors, the Prudential Regulation Authority and the Financial Policy Committee.

There are three main changes affecting the MPC:

• Simultaneous publication of MPC’s decision, MPC minutes and the Inflation Report • Reduction in the number of MPC meetings from 12 to 8 a year • Publication of “Day 2” transcripts of MPC meetings after a delay of 8 years2

From August 2015, the Bank will publish the MPC’s monetary policy decision, the minutes of the meeting and, in relevant months, the Inflation Report at the same time. Previously, the decision had been announced at the end of the MPC meeting. The minutes, which contain details of how each MPC member voted, were published around 2 weeks later. The Inflation Report was published between the decision and the minutes. The new arrangements mean there is no longer a delay between the MPC’s decision and details of how MPC members voted. It also brings the Bank into line with other central banks in providing an explanation at the same time as the decision is announced.

Warsh recommended reducing the number of MPC meetings from 12 to 8 a year. Warsh argued that judgements about the economy are unlikely to change over a 4 week period. Moving to 8 meetings a year would bring the Bank into line with the European Central Bank (ECB) and the US Federal Reserve. It would also give the MPC members and Bank staff more time for reflection. This change requires legislation and the Government has said that it will be included in the Bill.

The Bank has announced that it will publish transcripts of the MPC meetings at which policy is decided (but not the “deliberative” part of the meetings). The transcripts will be published after 8 years. This will improve the transparency and accountability of the MPC. It is also in response to concerns raised by the Treasury Committee about the lack of published transcripts.

1 The Treasury has published a technical consultation: HM Treasury, Bank of England Bill: technical

consultation, July 2015 2 The “Day 2” meeting is when the MPC makes the monetary policy decision. The Day 1 meeting is more

deliberative.

Number 7289, 7 September 2015 4

1. Background 1.1 Introduction In recent years, the Bank of England has been given greater responsibility for UK the financial system as a whole, in addition to its monetary policy role. This has raised issues related to the transparency and accountability of the Bank. Openness and accountability is one of the four pillars of the Bank’s Strategic Plan, launched in March 2014.3

The Bank has announced a number of changes to the MPC, designed to improve transparency and accountability. Some of these have already been implemented while others require legislation. In the 2015 Queen’s Speech, the Government announced its intention to bring forward a Bank of England Bill. This will include those measures relating to the MPC which require legislation. The Government has issued a technical consultation on the measures to be included in the Bill.4

The changes to the MPC are part of a wider programme of reforms aimed at improving the Bank’s transparency, accountability and governance. These wider reforms include changes to the Court of the Bank of England (the Bank’s board of directors) and publication of Court minutes.5 Some of these wider reform measures are also expected to be in the forthcoming Bank of England Bill. This note considers the changes to the MPC only.

Describing the overall package of measures, Mark Carney, Governor of the Bank of England, said:

The Bank now has immense responsibilities for monetary stability, financial stability and for microprudential regulation. And with these responsibilities comes the need for effective transparency, genuine accountability and robust governance. Today I am pleased to announce the most significant set of changes to how we present and explain our interest rate decisions since the Monetary Policy Committee was formed in 1997. Alongside those measures, we have also proposed a number of additional changes that will mark a step change in the governance of this institution. These changes will enhance our transparency and make us more accountable to the British people.6

3 Bank of England News Release, Bank of England launches Strategic Plan, 18 March

2014 4 HM Treasury, Bank of England Bill: technical consultation, July 2015 5 Bank of England, Transparency and Accountability at the Bank of England, 11

December 2014 6 Bank of England News Release, Bank of England announces measures to bolster

transparency and accountability, 11 December 2014

5 Improvements to Monetary Policy Committee transparency

1.2 The Warsh Review On 30 April 2014, the Bank of England commissioned Kevin Warsh to undertake a review of its transparency, especially that of the MPC.7 Warsh’s review was asked to consider the following issues:

• The possible benefits and costs of retaining and, in due course, publishing, a full transcript of MPC policy discussions and decisions.

• If a delayed publication were to be adopted, the appropriate length of delay.

• Whether publication would require any further changes to be

made to the procedures of the MPC. • The relative merits of alternative ways of improving the

transparency of policy discussions and decisions. • The applicability of any recommendations to the Financial Policy

Committee and to the Board of the Prudential Regulation Authority.8

The Warsh Review was published in December 2014 and made a number of recommendations to improve the MPC’s transparency:

• Publish policy decisions and rationale as soon as is practicable; reduce the number of MPC meetings from 12 to 8 a year.

• Enhance MPC minutes to better capture Day 1 deliberation. • Make Day 2 transcripts public with a deferral period of 5- 10

years. • Publish key inputs to the MPC policy meeting alongside Day 2

transcripts with identical deferral period. • Strengthen authorities of Secretariat; enhance archive policy and

practices.

7 Bank of England News Release, Transcripts of Monetary Policy Committee meetings,

30 April 2014. Mr Warsh is a former member of the Board of Governors of the US Federal Reserve.

8 Ibid

Number 7289, 7 September 2015 6

The Bank has announced that it accepts the Warsh recommendations. The steps the Bank has taken, or will take, to implement them are considered in the remaining sections of this note.

Box 1: The Monetary Policy Committee

Since the Bank of England was granted independence in 1997, its Monetary Policy Committee (MPC) has been the body which sets interest rates (and, more recently, the level of quantitative easing (QE)). The Chancellor of the Exchequer sets the inflation target (2% as measured by the Consumer Prices Index). The MPC aims to meet the inflation target through its decisions about interest rates and QE. At the moment, the MPC meets once a month. There are proposals to change this to 8 meetings a year (see section 3 below). The number of MPC meetings is set by statute so this change will require legislation. There are 9 MPC members: 5 from the Bank of England and 4 external members, appointed by the Chancellor of the Exchequer from outside the Bank to give an independent perspective. The 5 Bank of England members are the Governor, 3 of the Deputy Governors and the Bank’s Chief Economist. Each member of the MPC has expertise in economics and monetary policy – the members do not represent particular interests. Each member votes on decisions about interest rates and QE. The MPC’s decisions are communicated via publication of its minutes. MPC members are also held to account at their appearances before the Treasury Committee. They also give speeches setting out their views on the economy. MPC Membership Mark Carney, Governor Ben Broadbent, Deputy Governor, Monetary Policy Sir Jon Cunliffe, Deputy Governor, Financial Stability Dame Nemat (Minouche) Shafik, Deputy Governor, Markets and Banking9 Andrew Haldane, Executive Director, Monetary Analysis and Chief Economist, Bank of England Kristin Forbes, External member Ian McCafferty, External member Dr Gertjan Vlieghe, External member Martin Weale, External member

9 The forthcoming Bank of England Bill will make the Deputy Governor, Markets and

Banking an ex officio member of the MPC. The rules on the MPC quorum will also be adjusted (HM Treasury, Bank of England Bill: technical consultation, July 2015, para 4.16).

7 Improvements to Monetary Policy Committee transparency

2. Simultaneous publication of MPC decision, minutes and Inflation Report

The Bank announced in December 2014 that the MPC’s monetary policy decision and minutes would be published at the same time, with effect from the August 2015 meeting. The minutes provide details of the MPC’s decision and show how each MPC member voted. The Bank also announced that the Inflation Report would be published at the same time, in the relevant months.10

Previously, the announcement of the MPC’s decision, the minutes and the Inflation Report were published separately over a period of almost 2 weeks. For example, in August 2014, the MPC decision was announced on the 7th, the Inflation Report was published on the 13th and the minutes of the MPC meeting were published on the 20th. Furthermore, the press release announcing the decision generally gave little, if any, information about the reasons behind it. The Warsh Review noted that “Among its peers, the Bank stands alone in not routinely offering a contemporaneous explanation of its policy decision”.11

This timetable meant that the voting of individual MPC members could not be discussed at the press conference accompanying the Inflation Report. Individual MPC members could not reveal how they had voted in any comments they made for almost two weeks after the MPC meeting. The lag between the announcement of the interest rate decision and the publication of the MPC’s votes in the minutes could also allow speculation about the vote to develop.12 Publishing the interest rate decision, minutes and Inflation Report on the same day removes these problems, allowing MPC members to be open about how they had voted, in their speeches on monetary policy, for example.

This change is in line with Warsh’s recommendation that the rationale for the MPC’s decision should be published as soon as possible after the Committee’s meeting, including the votes of each member. Warsh said that this move “would further the Bank’s objective of communicating its judgements effectively”.13 It would also allow

10 Bank of England News Release, Bank of England announces measures to bolster

transparency and accountability, 11 December 2014. The Inflation Report is published quarterly in February, May, August and November.

11 Transparency and the Bank of England’s Monetary Policy Committee, Review by Kevin Warsh, December 2014, p7

12 “What to expect from Super Thursday’s data deluge”, Financial Times, 6 August 2015 13 Transparency and the Bank of England’s Monetary Policy Committee, Review by

Kevin Warsh, December 2014, p7

Number 7289, 7 September 2015 8

Committee members to be open about their votes soon after the meeting.

Some possible problems with simultaneous publication have been identified. For example, it has been suggested that this might lead to “information overload with key messages getting lost.”14 Also, the interest rate decision-making process now starts earlier to allow time for the minutes to be drafted. This could increase the risk of the interest rate decision being leaked.15

The forthcoming Bank of England Bill will amend existing legislation on the timing of the publication of the MPC’s minutes so that the Bank will be required to publish them as soon as reasonably practicable after the meeting.16

14 “What to expect from Super Thursday’s data deluge”, Financial Times, 6 August 2015 15 Ibid 16 HM Treasury, Bank of England Bill: technical consultation, July 2015 para 4.14.

Section 15 of the Bank of England Act 1998 requires publication of MPC minutes within 6 weeks of the meeting (subject to certain exceptions). Until October 1998, the minutes were published about 5 weeks after the meeting. Following a report by the Treasury Committee, the minutes were published after about 2 weeks from October 1998 (Bank of England, Monetary Policy Minutes )

9 Improvements to Monetary Policy Committee transparency

3. Reduction in number of MPC meetings from 12 to 8 a year

At present, the MPC meets once a month. This is a requirement of the Bank of England Act 1998.17 The Warsh Review recommended reducing the number of meetings to 8 a year, while retaining the Governor’s existing right to call at meeting at any time. Warsh argued that monetary policy required analysis of data over a period of time and that “rarely would a single four-week period be sufficient to change economic assessments”.18

In fact, the MPC has changed interest rates at successive meetings on a number of occasions. For example, rates were changed in 5 meetings in a row between October 1998 and February 1999, 3 successive meetings between September and November 2001 and 6 successive meetings between October 2008 and March 2009 (see table below). There are a number of examples of rates being changed in 2 successive months.

This is not the first time a reduction in the number of MPC meetings has been recommended. In 2007, the Treasury Committee said that, with hindsight, it would have been better if the Bank of England Act 1998 had not specified the number of meetings. In the Committee’s view, it should have been left to the Court of the Bank to decide, following

17 Schedule 3 Section 10 (1) requires the Committee to meet at least once a month.

The Act gives the Governor the power to call a meeting at any time, provided he gives adequate notice. This has happened only once since the formation of the MPC, in September 2001.

18 Transparency and the Bank of England’s Monetary Policy Committee, Review by Kevin Warsh, December 2014, p7

Interest rate changes

1997 Jun Jul Aug Nov

1998 Jun Oct Nov Dec

1999 Jan Feb Apr Jun Sep Nov

2000 Jan Feb

2001 (a) Feb Apr May Aug Sep Oct Nov

20022003 Feb Jul Nov

2004 Feb May Jun Aug

2005 Aug

2006 Aug Nov

2007 Jan May Jul Dec

2008 Feb Apr Oct Nov Dec

2009 Jan Feb Mar

Source: Bank of EnglandNote: (a) there w ere 2 MPC meetings in September 2001. The regular meeting

took place on 5-6 September and left the interest rate unchanged.The interest rate w as cut at the special meeting on 18 September.

Number 7289, 7 September 2015 10

advice from the Governor, subject to certain requirements, such as a minimum of 8 meetings, evenly spaced throughout the year.19

Fewer meetings would give MPC members and Bank staff more time for reflection. It would also bring the Bank of England more into line with the US Federal Reserve and the ECB. Since January 2015, the Governing Council of the ECB holds its monetary policy meetings every 6 weeks. Prior to this, it had met once a month.20 The US Federal Open Market Committee is scheduled to meet 8 times a year with provision for other meetings as necessary. 21

Responding to the Warsh Review, the Bank said that there was merit in reducing the number of MPC meetings to 8 a year.22 But as the frequency of MPC meetings is determined by Parliament, this change will require amendment of the Bank of England Act 1998. The Treasury has said that it intends to move to at least 8 MPC meetings a year in the forthcoming Bank of England Bill.23

The Bank has published a provisional schedule of MPC meetings for 2016 (see table below).

8 meetings will be more or less evenly spaced throughout the year (4 at the same time as the Inflation Report and 4 roughly halfway between Inflation Reports). In addition, there will be a further 4 meetings at which monetary policy decisions will be made but these will be joint meetings with the Financial Policy Committee. This timetable means there will be a monthly MPC meeting as required by the Bank of 19 Treasury Committee, The Monetary Policy Committee of the Bank of England: ten

years on, 12th report 2006-07, 18 September 2007, HC 299-I, para 86 20 ECB Press release, ECB publishes indicative calendar for Governing Council Meetings

and reserve maintenance periods in 2015, 17 July 2014 21 Federal Open Market Committee meeting calendar. An unscheduled meeting was

held (by videoconference) on 4 March 2014 when the Committee discussed issues related to forward guidance

22 Bank of England, Transparency and Accountability at the Bank of England, 11 December 2014, p3

23 HM Treasury, Bank of England Bill: technical consultation, July 2015 para 4.14.

Publication of MPC communicationsProvisional dates for 2016

14-Jan04-Feb17-Mar14-Apr12-May16-Jun14-Jul04-Aug15-Sep13-Oct03-Nov15-Dec

Source: Bank of England

11 Improvements to Monetary Policy Committee transparency

England Act 1998.24 The timetable announced for 2016 means that the interval between MPC meetings will vary between 3 and 6 weeks compared to a gap of 4 or 5 weeks in 2015.

24 Bank of England, Transparency and Accountability at the Bank of England, 11

December 2014, p3

Number 7289, 7 September 2015 12

4. Transcripts of MPC meetings In March 2014, the Treasury Committee questioned Bank officials about transcripts of MPC meetings. Paul Fisher (Executive Director, Markets, Bank of England) told the Committee that the MPC no longer kept transcripts of its meetings. The meetings were recorded but after the minutes had been published, these recordings were destroyed. Andrew Tyrie MP, Chair of the Committee, said that the transcripts had “huge historical significance” and that the US Federal Reserve published transcripts after a delay of five years.25 He asked the Governor to prepare a note on the issue of transcripts and their publication.

In a letter to Mr Tyrie, the Governor said that the MPC experimented with transcripts for a few months after its formation in 1997. These were stopped, however, as they were expensive and thought to add little to the published minutes. Mr Carney said that the Bank would look at this issue again and that its Oversight Committee intended to commission an external review into the recording of policy meetings, the retention of these recordings and the possible publication of transcripts.26

The Warsh Review recommended that “Day 2” transcripts of MPC meetings be made public with a deferral period of 5- 10 years.27 This would improve the accountability of individual MPC members. Warsh also argued that more transparency about briefing given to the MPC by Bank staff would improve accountability. Release of this information, together with the Day 2 transcripts as recommended above, would provide “a fuller picture of the nature and context of the policy discussions”.28

In response, the Bank announced that it would publish written transcripts of Day 2 of MPC meetings, in line with Warsh’s recommendations. Transcripts will be published 8 years after the meeting. This will balance transparency and accountability with the need to maintain a “safe space” for policy deliberations. The Bank will also publish, alongside the transcripts, the key briefing material from Bank staff. These new arrangements will apply from March 2015.

25 Treasury Committee, Bank of England Inflation Report February 2014 (Oral

evidence), 11 March 2014, HC 1145, Qq 94-97 and Q102 26 Letter from Mark Carney, Governor of the Bank of England to Andrew Tyrie MP,

Chair of the Treasury Committee, 1 April 2014 27 Day 2 of the MPC meeting is when MPC members explain and justify their policy

decision. On Day 1, discussions are more deliberative. Warsh did not recommend publication of Day 1 transcripts.

28 Transparency and the Bank of England’s Monetary Policy Committee, Review by Kevin Warsh, December 2014, p10

BRIEFING PAPER Number 7289, 7 September 2015

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