Nowadays, the Chancellor specifies the inflation target each year, in a letter to the Governor, but decisions about interest rates are taken by a Committee of nine independent experts who have strong incentives to keep inflation close to target. That is not just because a measurable target provides a clear focus for decisions, important as that is. The regime is intentionally highly transparent with a heavy emphasis on accountability to Parliament and the general public as well as the government of the day. Our individual votes are a matter of public record, and we regularly appear in front of the Treasury Committee to explain our decisions. Minutes of MPC meetings are published within a fortnight. And every three months, we publish an Inflation Report, with the MPC s views on the outlook for growth and inflation over the next three years. This is the subject of regular briefings to business audiences around the country as well as a high profile press conference fronted by the Governor. All this gives monetary policy watchers - in financial markets and in the country at large - plenty of information by which to judge how we are doing, as well as to form their own expectations of future inflation and growth. How successful have we been in establishing a credible policy regime? A key test is what people expect about inflation, and in particular how those expectations react to unexpected economic news. If the regime is credible, people should expect inflation to stay close to target.
Bank staff grade data series on a number of quality criteria, and we use this grading to make the best use of the available information. The basic principle is simple: a sensible approach to economic assessment takes a weighted average of all available indicators, where the weight placed on each reflects the quality of that indicator relative to other available data. Generally speaking, in terms of overall accuracy the highest quality data come from the ONS and other national statistical agencies. This is scarcely surprising, since they have a very comprehensive information base. For example, ONS data on manufacturing output are based on surveys of 10,000 of the UK’s 160,000 manufacturers. All firms with more than 150 employees are surveyed, supplemented by stratified random sampling of smaller companies. Some private-sector business organisations - such as the Chartered Institute of Purchasing and Supply, the CBI and the British Chambers of Commerce - also publish surveys of manufacturers. But these samples are typically less than one-tenth of the size of those used by the ONS. On top of that, the private-sector surveys ask only whether activity has risen or fallen, rather than recording exactly how much activity has changed. This can be a particular problem when sub-sectors of an industry are experiencing dramatic movements in output compared with the rest of the sector.