Empowering the MPC

The process of setting interest rates in the UK has undergone a revolution since Nigel Lawson famously said that he made the decisions and the Bank of England carried them out. The first steps towards Bank independence were taken after Black Wednesday, when the governor and the chancellor would meet every month to discuss rates. Edited minutes of the meeting were published, but ultimately the chancellor's view prevailed, even when every Bank official - and, occasionally, every Treasury official too - disagreed.

All that changed on the Tuesday after the 1997 election. Gordon Brown said his intention was to take the politics out of interest rate decisions by giving the Bank day to day control over monetary policy. A new, four-part process was introduced. At its apex sits the chancellor. He sets the rules for the Bank's monetary policy committee, fixing a target for inflation - at present 2.5% on the measure that excludes mortgage interest payments. If inflation falls below 1.5%, Sir Eddie George will have to send an open letter to the chancellor explaining what steps he is taking to return to the target. That is because the target is symmetrical - an undershoot is considered to be as serious as an overshoot.

Once the target has been set, it is up to the MPC to meet it. Meetings are normally held on a Wednesday and Thursday early each month, although the process actually begins on the previous Friday, when MPC members run through all the latest economic data and are given reports by the Bank's agents. One will present a picture of life in the regions, another will give the findings of a specific question asked each month. In February, the MPC wanted to know why investment was so low. At the decision-making meeting, each MPC member has a say before the vote is taken. A simple majority is sufficient.

The government has sought to make the process transparent. Minutes are published two weeks after the meeting, a detailed guide to the Bank's thinking is provided in the quarterly inflation report and MPC members make regular speeches explaining their views. Some believe the system is not yet transparent enough, however. The Lords committee on the MPC said yesterday that the chancellor should consider involving the commissioner for public appointments in the scrutiny of new members of the body.

Finally, the MPC is accountable to parliament - where both the Commons and the Lords hold regular hearings to scrutinise the conduct of monetary policy and question the individual members of the committee.