MNI INTERVIEW: BOE Appointments Need More Transparency-Bridges

A reformed process of appointing members to the Bank of England’s Monetary Policy Committee should be more transparent, but not so transparent as to deter applicants, Lords Economic Affairs Committee chair Lord Bridges told MNI, stressing that it was crucial to ensure greater diversity of thinking among policymakers while steering clear of the dangers of politicisation.

The Lords Committee heard options for changing the MPC’s secretive appointments procedures before presenting its recent report on the BOE, but came to no conclusion and simply called on the Treasury to review best practice at other central banks as well as at independent entities such as the judiciary.

“In regards to the appointments, what is obviously all important is that you do not want to end up politicising that process,” Bridges said in an interview. “Second point, while you want the process itself to be transparent to the outside world, you need to get the right balance. For example, if someone throws their hat in the ring and doesn’t get the job, and the process is fully transparent, their reputation might suffer. That may deter people from applying.”

BERNANKE REVIEW

The BOE needs more diversity of views and to foster an environment which allows arguments to be challenged, the report said, noting the trend for senior Treasury officials to migrate to the MPC. Concerns over the appointment process also circulated in markets during the short-lived premiership of Liz Truss, when some speculated she could be tempted to appoint political allies.

The Bank, having extended its mandate to environmental issues and having under-estimated inflation persistence in its central forecasts, is now under pressure to reform. Ben Bernanke is reviewing its forecast procedures, and Bridges said he hopes that given the links between people and procedures the former Federal Reserve chief will take account of the need for greater diversity of opinions. (See MNI POLICY: Bernanke Review Looks At BOE Rate Path, Scenarios)

The report also called for greater accountability to parliament. While it specified no mechanism beyond a five-yearly review of BOE performance, one alternative could be to establish a joint committee across the upper and lower houses, possibly along the lines of the bi-cameral Banking Standards Commission.

Bridges said making the Bank more accountable should focus on making it answer to parliament and not on enhancing its dependency either on government, which he said “would potentially undermine the Bank's independence”, or on its existing oversight body, the Independent Evaluation Office.

The Lords Committee considered whether the Independent Evaluation Office could “be hived off from the Bank and be made an entirely independent entity. It decided that this would not be advisable as this risked creating an enormously powerful body, which could undermine the Bank’s independence,” he said.

MONETARY AGGREGATES

The Lords’ Committee also made the case for the BOE to pay greater attention to monetary aggregates and questioned the viability of its general equilibrium forecasting models, which are built on the assumption of inflation eventually returning to target and growth to trend.

But the choice of Bank models, rather than the use and communication of them, again falls outside Bernanke’s remit and some current and former MPC members, such as Gertjan Vlieghe, have highlighted that it would anomalous for the BOE to produce forecasts implying that it would fail to do its job of returning inflation to target over three years