The roots of the MPC
Before the Monetary Policy Committee existed, the Chancellor (Kenneth Clarke in 1997 was the final individual before restructuring), used to set the monetary policy.
However, there was growing concern due to high inflation and booms in the economy. It was in the 1990’s, that there was a growing consensus that monetary policy should be independent of the Government, therefore adding credibility to interest rate decisions. The committee was established by the Bank of England Act in 1998 and included a group of 9 individuals. Not only are they responsible for setting the interest rates, but they are also responsible for publishing a quarterly inflation report that assesses the economy and any future plans.
The MPC’s aims
The committee aims to achieve a multitude of economic goals such as economic growth, price stability as well as full employment. Now we will take a further look back at its history.
The first central bank was established in Sweden in 1668. They were given the authority to issue bank notes which allowed them to control the money supply and interest rates more effectively. Interest rates were initially used as a monetary policy tool in the 18th century which would affect the cost of borrowing and eventually, the level of economic activity. If inflation is too high, the central bank might respond by raising interest rates to slow down economic growth. On the other hand, if inflation is too low, the central bank may lower interest rates to stimulate economic growth.
In modern times
Monetary policy has become an essential part of modern economics. Their meetings take place eight times a year, with a space of 6 weeks in between each meeting. Similarly, they post a quarterly report, providing an assessment of the UK economy. Meetings are held over two days and are attended by nine members of the committee which includes; the Governor of the Bank of England, three Deputy Governors, and four external members. Within the meeting, members discuss the latest economic developments and forecasts and then vote on whether to change the interest rates or take other measures. Their decisions are announced to the public on the Thursday following the second day of the meeting at midday and they also publish a summary of their decision and the minutes of the meeting two weeks later.