The Chancellor decided last May that he would no longer exercise his powers to set short-term interest rates. Anticipating the Bank of England Bill, he set an inflation target and delegated the technical implementation of monetary policy to achieve that target to a new Monetary Policy Committee established within the Bank. BIS Review 18/1998  -3-  The Monetary Policy Committee has been operating independently in setting interest rates ever since. This position is formalised under the Bill. With respect to monetary policy the Bill defines the Bank’s objective as the maintenance of price stability, and, subject to that, as supporting the Government’s economic policy, including its objectives for growth and employment. The Chancellor will tell the Bank each year what precisely we are to understand by “price stability” - he will, in other words - set a specific inflation target. He has in fact initially set a target of 2½% for underlying inflation, and although the Bill provides for him to set the target each year, the expectation is that the target is for the medium to longer term. That is the political decision. The task of achieving that target - the technical implementation of monetary policy - is then delegated to the Bank of England. The Government will no longer have the power to issue directions to the Bank in the field of monetary policy (except, in the terms of the Bill, in “extreme economic circumstances”). Instead, the Bill will formally establish the Monetary Policy Committee.
Court as a whole will set the Bank’s strategy, determine its budget and in the hallowed language of the 1946 Bank of England Act - “manage the affairs of the Bank”. In this sense we remain a unitary board. But, under the present Bill, the sixteen non-executive members, as a group, will be given the specific duty of reviewing the performance of the Bank, including the conduct of its financial affairs, and including the procedures of the Monetary Policy Committee, satisfying itself inter alia, that the Monetary Policy Committee takes proper account of economic conditions in the various regions of the country. The prospective non-executive appointments to Court announced last week in fact include increased representation from the regions, with members from Scotland, Wales and Northern Ireland. The non-executives will have their own chairman, appointed by the Chancellor. The first chairman will in fact be Dame Sheila Masters of KPMG, currently Vice-President of the Institute of Chartered Accountants of England and Wales. They will be required to report on the Bank’s BIS Review 18/1998  -2-  performance to Parliament in a separate section of the Bank’s Annual Report. The Bank’s Remuneration and Audit Committees will, as now, be made up entirely of non-executive members of Court. All of this is in the spirit of the most modern principles of corporate governance. The Bank’s finances A second important change relates to our finances.