The Bank of England Agencies and the Monetary Policy Committee

Kevin Butler is the Bank of England's South West Regional Agent. In this article he explains the part played by the Agencies in feeding information to the MPC and in communicating the Bank’s thinking to the business community. The latter role makes an important contribution to the transparency of monetary policy making.

The Monetary Policy Committee (MPC) reaches its 7th anniversary in May this year. Its monthly decisions on the level of interest rates required to achieve the UK Government’s target for inflation are reported extensively by all branches of the media. Financial journalists, investment analysts and economists in a variety of roles study the MPC’s minutes, published two weeks after the latest policy decision.

The MPC’s independent role is set out in the 1998 Bank of England Act, which stipulates that the Bank must set interest rates so as ‘to maintain price stability and, subject to that, to support the economic policy of HM Government, including its objectives for growth and employment’. In turn the Government defines what it means by price stability in a ‘Remit’ to the MPC, which must be set out in writing at least annually and must be published. The latest Remit from the Chancellor, issued in December 2003, changed the reference measure for inflation from the Retail Prices Index excluding mortgage interest payments (RPIX) to the Consumer Prices Index (CPI) and set a target for the annual rate of increase of 2.0 per cent (previously 2.5 per cent).


Local agencies and the Monetary Policy Division
The MPC uses a wide range of statistical and other material in order to reach their monthly decision. Much of this is provided by the Bank's Monetary Analysis Division in a range of ways, for example in developing the projections for the UK economy that are published in the quarterly Inflation Report.1 Much of the information the MPC needs is in the public domain and published by the Office for National Statistics and other agencies or trade associations. It considers financial market and asset prices as well as other conjunctural information. But it also draws on the 8,000 or so business contacts of the Bank’s Agencies to obtain additional information on a regional and sectoral basis; and members of the MPC undertake some 50-60 visits to the countries and regions of the UK each year, with at least ten of these undertaken by the Governor.

Although regional representatives have been providing economic information based on discussions with business contacts since 1930 — and banking and note issuing facilities in the English regions go back to the 19th century — the creation of the MPC increased the importance of this work in the monetary policy process. The Agencies are integral within Monetary Analysis and enable the Bank to have local representation in Scotland, Wales and Northern Ireland as well as in nine regions of England. The latter mostly coincide with the official standard planning regions, but there are some differences reflecting economic and geographical factors. Agency premises are located in metropolitan and business centres and spread across the country. Each Agency typically has a team of four staff, led by the Agent. The backgrounds of individual agents vary considerably but generally they have a good grounding in macroeconomics as well as experience of business and finance. Since much of the work involves representing the views of the Bank to the public, and vice-versa, good communication also come in handy.

Helping the MPC
The Agencies’ purpose is two-fold : firstly, to provide monthly reporting to assist the MPC in its work and, secondly, to help to explain to the communities in which the Agencies operate the thinking behind the MPC's decisions and to help to maintain confidence in the monetary policy process.2

For the first objective, the Agencies produce a confidential monthly economic report based on discussions with a cross-section of companies in terms of sector, location and size. The report covers sales and orders (both domestic and export), costs and prices, pay and earnings, employment and business investment. The information is gathered through a structured programme of visits, ensuring that each report is based on a representative mix of businesses, broadly reflecting the contribution of each sector to GDP. The visit programme is supplemented with information obtained from a range of private and public sector organisations, eg CBI regional councils, Chambers of Commerce, trade associations, local authorities and universities.

The Agencies’ monthly reports individually represent an analysis of current economic conditions as seen throughout the United Kingdom. The individual reports are distilled into a monthly national summary and a quarterly version of this is published with the Inflation Report.

Each month, usually on the Friday morning preceding the policy decision, the MPC is briefed on current economic and market developments by senior Bank staff. Four Agents (one each from the North, Midlands and South of England, and one from Scotland, Wales or Northern Ireland), plus three Deputy Agents, attend these pre-MPC meetings. Two of the Agents deliver a presentation to the Committee — one an update on the key issues for the UK economy based on the monthly reporting process, the other on a special topic chosen by the MPC after the previous month's policy decision.

The topic usually involves a subject on which the MPC would like more information, perhaps to resolve a puzzle in the data or to tackle a question that Agency business contacts may be especially well placed to answer. For example, in considering the extent to which the gap between actual and potential output may be closing, with a risk of higher inflation if the economy runs out of spare capacity, the MPC recently commissioned a survey of the ability of firms to respond to increasing orders without meeting capacity constraints. Other issues surveyed by the Agencies over the past year have included determinants of domestic prices, manufacturing output, business investment, exports of goods and services, pay settlements and retail sales.

In a recent speech at the University of the West of England in Bristol, Rachel Lomax, Deputy Governor for Monetary Policy and a member of the MPC, commented on the Agencies’ contribution in explaining the stories underlying the data or in spotting ‘the bends in the trends’. An example she gave related to consumer spending. Since 1996, the National Accounts have painted a picture of a boom in household spending, with the volume of personal consumption growing by 3.75 per cent per annum on average, while real GDP was increasing by 2.75 per cent . But for the past two years or so, she said, the Bank’s Agents have been reporting a much tougher world ‘out there’, with demanding shoppers on a ceaseless search for value using new technology to search out bargains as well as to make purchases, driving an endless round of discounting across a wide range of consumer goods. The way to resolve this apparent contradiction is that the fall in the price of durables (by some 14 per cent since 1998) has boosted consumers’ purchasing power for a given level of income and this has enabled higher spending across a wide range of goods and services, including those that have been rising in price.

Promoting transparency
In recent years, economists have become acutely aware of the benefits of transparency in monetary-policy making. Speaking on the fifth anniversary of the Bank’s adoption of inflation targeting,3 Mervyn King announced that the Bank’s ambition was to make monetary policy boring. In an ideal world, people would have such a good understanding of the way the Bank’s mind works that decisions by the MPC could never be a surprise. The Agencies’ second objective is central to the process of educating the public in the MPC's way of thinking and to making the case for low inflation as a pre-condition for sustainable economic growth. The Agents and their Deputies have a programme of regular speaking engagements, including briefings to business audiences following the national launch of the quarterly Inflation Report by the Governor. The Agencies also facilitate speaking engagements and meetings for MPC members. Agency presentations and visits to schools, colleges and universities provide additional support material for the standard programmes of teaching; and judging heats of the annual ‘Target 2.0’ (formerly ‘Target 2.5’) competition for 6th formers taking Economics and Business Studies has become an established part of the Agents' work, leading to the national final in Threadneedle Street in March.

In practice it is difficult to separate the Agencies’ two objectives because, inevitably and desirably, the representative role involves a two-way flow of information. The Agencies’ role combined with the regular visit programme by the Governor and other members of the Monetary Policy Committee ensures that the monetary policy process takes fully into account issues affecting the whole of the UK.

Notes:

1. Copies of the Inflation Report can be downloaded from www.bankofengland.co.uk/inflationrep/index.html

2. For more on the Agencies’ role see (www.bankofengland.co.uk/qb/qb030105.pdf) and John Beverly, 'The Bank's Regional Agencies', Bank of England Quarterly Bulletin, 1997, 37 (4), 424-7.

3. Mervyn King, ‘The Inflation Target Five Years on’, Bank of England Quarterly Bulletin, 1997, 37 (4), 440.

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