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What is the Monetary Policy Committee?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 30 January 2020
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The best known Monetary Policy Committee is that of the Bank of England. It is responsible for deciding monetarist economic policies, most notably interest rates, in the United Kingdom. Other similar committees exist in several other countries.

The UK Monetary Policy Committee was created by the British government in 1997, shortly after a change in the governing party. Before this time, all economic policy was under government control, but this had caused criticism after ministers had raised interest rates several times in the space of a few days in an attempt to influence currency exchange rates, a move some saw as politically, rather then economically, motivated. The idea of the 1997 change was to produce a clear split between the government's control of fiscal policy such as taxation and public spending, and the Bank of England's control over the monetary supply.

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There are nine members of the Monetary Policy Committee: the governor and two deputies of the Bank of England, two senior staff members, and four people from outside the bank who are appointed for a three-year term by the Chancellor of the Exchequer, the government's senior finance minister. The key role of the committee is to vote once a month on whether to increase or decrease the bank's base rate, or leave it unchanged. The base rate influences the rates banks charge one another to borrow money, and ultimately the rates the public and businesses must pay for loans. Many mortgages have rates that are directly linked to, or heavily influenced by, the base rate.

Another role of the committee that came into prominence after 2007 is the decision of if and when to carry out quantitative easing. This involves the Bank of England buying assets, such as government bonds, from financial institutions, including banks. This increases the amount of cash the institutions have on hand and, in turn, the amount those institutions are legally allowed to lend to the public. Quantitative easing is seen as a way of increasing the monetary supply, though critics argue there is no guarantee that the financial institutions will increase lending rather than sit on the cash.

There is an organization known as the Shadow Monetary Policy Committee that also meets and gives its opinion on monetary economic issues. This is not a shadow committee in the Parliamentary sense, and has no official role. It is organized by the Institute of Economic Affairs, an independent body, and consists largely of academics and economists.

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