Definition of monetary policy committee (MPC)

In 1997, the UK Treasury granted the Bank of England operational independence over the conduct of monetary policy. Politicians have a poor track record of maintaining the purchasing power of money, because they have an incentive to use inflation for political objectives. One way to credibly commit to a low inflation environment is to relinquish some control to a panel of independent experts.

The monetary policy committee (MPC) is chaired by the Governor of the Bank of England and is comprised of four other members of the Bank, and four external members. Their main objective is to ensure low and stable inflation (consistent with a target rate set by the Treasury) and to maintain confidence in pound sterling.

The traditional tool to do this is the Bank rate of interest – the rate that they charge commercial banks to borrow money. When this is at its lower bound there are a number of other tools that the MPC can use, for example, quantitative easing.

Whilst most economists agree that inflation is the result of the money supply being too high, they differ in how true this is over the short term. Inflation “hawks” tend to place an emphasis on lower inflation above all other considerations, while “doves” are more likely to tolerate a looser monetary stance. [1]

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