Monetary Policy Framework
The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government's inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.
The 1998 Bank of England Act made the Bank independent to set interest rates. The Bank is accountable to parliament and the wider public. The legislation provides that if, in extreme circumstances, the national interest demands it, the Government has the power to give instructions to the Bank on interest rates for a limited period.
The inflation target
The inflation target of 2% is expressed in terms of an annual
rate of inflation based on the Consumer Prices Index (CPI).
The remit is not to achieve the lowest possible inflation rate.
Inflation below the target of 2% is judged to be just as bad
as inflation above the target. The inflation target is therefore
symmetrical.
If the target is missed by more than 1 percentage point on either side – i.e. if the annual rate of CPI inflation is more than 3% or less than 1% – the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.
A target of 2% does not mean that inflation will be held at this rate constantly. That would be neither possible nor desirable. Interest rates would be changing all the time, and by large amounts, causing unnecessary uncertainty and volatility in the economy. Even then it would not be possible to keep inflation at 2% in each and every month. Instead, the MPC’s aim is to set interest rates so that inflation can be brought back to target within a reasonable time period without creating undue instability in the economy.
The Monetary Policy Committee
The Bank seeks to meet the inflation target by setting an interest
rate. The level of interest rates is decided by a special committee
– the Monetary Policy Committee. The MPC consists of nine
members – five from the Bank of England and four external
members appointed by the Chancellor. It is chaired by the Governor
of the Bank of England. The MPC meets monthly for a two-day
meeting, usually on the Wednesday and Thursday after the first
Monday of each month. Decisions are made by a vote of the Committee
on a one-person one-vote basis.
Communications
The interest rate decision is announced at 12 noon on the second
day. The minutes of the meetings, including a record of the
vote, are published on the Wednesday of the second week after
the meeting takes place. Each quarter, the Bank publishes its
Inflation Report, which provides a detailed analysis of economic
conditions and the prospects for economic growth and inflation
agreed by the MPC. The Bank also publishes other material to
increase awareness and understanding of its monetary policy
function.
Key Resources
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Letter to the Governor from the Chancellor Remit for the Monetary Policy Committee March 2007 Download PDF (160k) |
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Highlights of The New Inflation Target Speech by the Governor in January 2004 Download PDF (108k) |
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Webcast of speech by the Governor |
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The New Monetary Policy Framework Letter from the Chancellor to the Governor dated 6 May 1997 Download PDF (197k) |
