The second concerns how to manage a process in which the group has a common objective but in which individual members are held personally accountable for their decisions. Symmetry of the target The inflation target which the Chancellor has given to the MPC is a simple point target for RPIX inflation of 22%. Prior to May 1997, the inflation target was 22% or less. The meaning of those words “or less” was never entirely clear. Rarely in the history of economic policy have so few words caused so much confusion to so many economic commentators. Moving to a symmetric point target has removed any ambiguity as to the objectives of the MPC. That is important because the rationale for handing operational responsibility for setting interest rates to the MPC is that it is better qualified to make those decisions than elected politicians, whereas elected politicians have the democratic legitimacy to choose the target. A symmetric inflation target should also make it easier for people to understand how the MPC is likely to react to the different types of shock that may hit the economy from time to time. In more technical language, the MPC’s policy reaction function should be predictable. When an unexpected shock moves inflation away from the target, it may not always be sensible, or indeed feasible, for the MPC to return inflation to the target level immediately. Shocks stay in the twelve-month increase of the RPIX index for at least twelve months.
… On the evidence of the previous six months, the MPC bears a closer resemblance to a post-graduate seminar than to a forum for strategic decision-making. …To put [several] economists in the same room is to invite what one commentator has called paralysis by analysis. As a result the Committee’s conclusions are entirely unpredictable.” Since the beginning of 1998, the Committee has been unanimous at only one out of sixteen meetings. That was in July of last year when the Committee voted to hold interest rates constant at 7.5%. Disagreements have become the norm, and are much less remarked upon by the press than they were before. Moreover, disagreement is now more widely accepted as natural. It would be strange if the uncertainties facing the Committee were not reflected in small differences of opinion. And views of the appropriate level of rates have never differed by more than 0.5 percentage points. Nor have these technical disagreements led to “paralysis by analysis”. Indeed, the Committee has reduced interest rates by 23 percentage points since October of last year. It was precisely the analysis that led to the action. The willingness of the MPC to change interest rates either up or down in order to meet the symmetric inflation target has altered commentator’s perceptions of the Committee itself. Early in its history, commentators were unable to resist labelling members of the Committee as either “hawks” or “doves”.