History
Traditionally, the Treasury set interest rates. After reforms in 1992, officials held regular meetings and published minutes, but were not independent of government, leading to a feeling that political factors were clouding what should be purely economic judgements on monetary policy.
On 6 May 1997, operational responsibility to set interest rates was granted to the independent Bank of England by the Chancellor of the Exchequer, Gordon Brown. Guidelines for the creation of a new "Monetary Policy Committee" were laid out in the Bank of England Act 1998. The Act also set out the responsibilities of the MPC: it would meet monthly; its membership comprise the Governor, two Deputy Governors, two of the Bank's Executive Directors and four members appointed by the Chancellor. It should publish minutes of all meetings within six weeks (in October 1998 the committee announced plans to publish far more quickly, after only one). The Act gave the government responsibility for specifying its price stability target and growth and employment objectives at least annually. The government reserved the right to instruct the Bank on what rate to set in times of emergency.
The years 1998 to 2006 witnessed an unprecedented period of price stability - during which inflation stayed within a percentage point of the target - despite earlier predictions that it could move outside the range forty or more percent of the time. A 2007 report produced for the Treasury Committee noted that the MPC's independence of government "has reduced the scope for short-term political considerations to enter into the determination of interest rates." The creation of the MPC, it said, brought with it "an immediate credibility gain".
The original inflation target for the MPC was 2.5% on the RPI-X measure of inflation, but in 2003 this was changed to 2% on CPI. Under the Bank of England Act, on 16 April 2007, the governor (Mervyn King), was obliged to write the first MPC open letter to the chancellor (then Gordon Brown), explaining why the inflation had deviated from the target of 2% and reached 3.1%. With prices more unstable since 2007, as of November 2011, he has had to write 13 such letters to chancellors.
In its first ten years, the MPC kept interest rates relatively stable between 3.5% and 7.5%. Between October 2008 and March the following year, however, base rate was cut six times to an all-time low of 0.5% in order to avoid deflation and spur growth. In March 2009, the MPC launched a programme of quantitative easing, initially injecting £75 billion into the economy. As of March 2010, it voted to keep rates at 0.5% and had increased the amount of money set aside for quantitative easing to £200 billion, a figure later increased by a further £75 billion in the months following October 2011. The MPC announced a further £50 billion of quantitative easing in February 2012 – bringing the total to £325 billion – whilst simultaneously keeping the base rate at 0.5%.
Read more about this topic: Monetary Policy Committee
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