Monetary Policy Committee - Purpose

Purpose

The Committee is responsible for formulating the United Kingdom's monetary policy, most commonly via the setting of the rate at it which it lends to banks (officially the Bank of England Base Rate or BOEBR for short). As laid out in law, decisions are made with a primary aim of price stability, defined by the government's inflation target (2% on the Consumer Price Index as of 2011). The target takes the form of a "point", rather than the "band" used by the Treasury prior to 1997. The secondary aim of the Committee is to support the government's economic policies, and help it meet its targets for growth and employment. The MPC is not responsible for fiscal policy, which is handled by the Treasury itself, but is briefed by the Treasury about fiscal policy developments at meetings. Criticism of the MPC has centred around its predominant focus on inflation to the detriment of growth and employment. There have also been complaints about the reluctance of lenders to pass on rate changes.

Under the Bank of England Act 1998 the Bank's Governor must write an open letter of explanation to the Chancellor of the Exchequer if inflation exceeds the target by more than one percentage point in either direction, and once every three months thereafter until prices are back within the allowed range. It should also set out what plans the Bank has for rectifying the problem, and how long it is expected to remain at those levels in the meantime.

In January 2009 the Chancellor announced an Asset Purchase Facility (APF), to be administered by the MPC, aimed at ensuring greater liquidity in financial markets. The committee had already started to cut rates the previous autumn, but the effect of such changes can take up to two years; equally, rates could not go below zero. By March 2009, faced with very low levels on inflation and interest rates already at 0.5%, the MPC voted to start the process of quantitative easing–the injection of money directly into the economy–via the APF. It had the Bank buy government bonds (gilts), along with a smaller amount of high-quality debt issued by private companies. (As of January 2012, it holds these in a ratio of about 500 to 1 in favour of the gilts.)