The current framework for monetary policy is provided by the 1998 Bank of England Act which formally gives the operational responsibility for setting interest rates to the Bank of England. Under these arrangements, the Bank’s monetary policy objective is to deliver price stability (as defined by the Government’s inflation target) and, subject to that objective, to support the Government’s economic policy, including its objectives for growth and employment. The Government’s inflation target will be confirmed in each Budget Statement. In June 1997, the Chancellor announced that he was setting the Bank a target of 2.5% for retail price inflation excluding mortgage interest payments (RPIX).

Decisions on interest rates are normally made by the Monetary Policy Committee (MPC) of the Bank which was established by the 1998 Bank of England Act. The MPC consists of the Governor and the two Deputy Governors of the Bank, two members appointed by the Bank after consultation with the Chancellor, and four members appointed by the Chancellor. A representative of the Treasury attends meetings in a non-voting capacity.

The MPC meets monthly. Decisions are announced immediately after the meeting and the minutes are published two weeks later (though there are provisions for delaying publication of information on market intervention by the MPC in certain circumstances). Increased accountability to Parliament and the public is achieved through the publication of the minutes, and the continued publication of the Bank’s Inflation Report, as well as through appearances by MPC members before the Treasury Select Committee of Parliament and through the Bank’s Annual Report. The Governor is also obliged to write an open letter to the Chancellor if inflation deviates more than 1% on either side of the 2.5% target. Under certain circumstances, the Bank of England Act allows the Treasury to give instructions to the Bank in the field of monetary policy for a limited period of time. These powers can only be used if the Treasury is satisfied that they are required in the public interest and only by ‘extreme economic circumstances’.

Reproduced by kind permission of the Bank of England