Monetary policy in the UK

The Monetary Policy Committee (MPC) and its remit
Co-ordination between monetary and fiscal policy
Key documents on the Monetary Framework
External links on Monetary Framework

The Remit for the MPC requires the Governor of the Bank of England to write to the Chancellor if inflation deviates from the 2 per cent target by more than one percentage point.

In May 2008, the CPI inflation figure exceeded 3 per cent, and the Governor published an open letter to the Chancellor at 10:30 on 17 June 2008, explaining the reasons why inflation moved away from the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor published a letter to the Governor at 10:30am on the same day.

In March 2007, the CPI inflation figure was 3.1 per cent, and the Governor published an open letter to the Chancellor at 10:30 on 17 April 2007, explaining the reasons why inflation has moved away from the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor published a letter to the Governor at 10:30am on the same day.

On 12 March 2008, the Chancellor wrote to the Governor of the Bank of England restating the monetary policy remit.

The Chancellor announced on 10 December 2003 the operational target for monetary policy will with immediate effect switch to a target based on the Consumer Prices Index (CPI). The level of the new (CPI) inflation target is being set at 2 per cent. All other aspects of the framework have remained the same.

The monetary policy framework (PDF) is designed to promote economic stability by delivering low and stable inflation. This objective is shared with the new fiscal policy framework and involves effective co-ordination between fiscal and monetary policy(PDF). The monetary framework is founded on the Government’s view that price stability is the essential foundation for high and stable levels of growth and employment, and that in the long run there is no trade-off between inflation and output and employment.

Its key features are:

  • The Government sets the monetary policy objective and the inflation target in a remit which is renewed annually.
  • The Monetary Policy Committee (MPC) is required to meet the Government’s inflation target of a 2 per cent increase in the 12-monthly Consumer Prices Index at all times.
  • The target is symmetric so that deviations below target are treated as seriously as those above target.
  • The MPC publishes minutes of its decisions two weeks later.
  • Deviations of more than one percentage point above or below the target require an Open Letter from the Governor of the Bank to the Chancellor. This will explain the cause of the deviation, how long inflation will be away from target, what action the MPC is taking, as well as how this will be consistent with the Government’s wider economic policy objectives.
  • Policy co-ordination is facilitated by the presence of a non-voting Treasury representative on the MPC.
  • The MPC also publishes a Quarterly Inflation Report.

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Monetary Policy Committee

Under the new monetary policy framework the Monetary Policy Committee is entrusted with the responsibility of choosing the appropriate level of interest rates to meet the Government’s price stability objectives. The MPC meets on a monthly basis and decisions are made by a vote of the Committee on a one-person one-vote basis. It is made up of 5 senior Bank officials and four independent experts appointed by the Chancellor. Treasury has the right to be represented in a non-voting capacity with an observer attending the meetings.

Documents relating to the MPC's remit are available below in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website. For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.

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Co-ordination between monetary and fiscal policy

The fiscal and monetary frameworks are characterized by high levels of openness, transparency, and accountability. As Government sets both objectives, co-ordination between both arms of macroeconomic policy has been enhanced. A recent paper by HM Treasury suggests that the new framework is better co-ordinated than the previous arrangements where the Chancellor set both UK interest rates and fiscal policy.

Key documents on the Monetary Framework

External links on Monetary Framework

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