News Analysis: Clues to the MPC's Thinking on Rates News Analysis: The Bank of England Is Opening Up about How the Monetary Policy Committee Makes Its Decisions Are Made

Article excerpt

THE BANK of England will today publish for the first time comprehensive details of economic models used by the Monetary Policy Committee when setting UK interest rates.

The move - designed to improve "the understanding and transparency of monetary policy", according to Eddie George, Governor of the Bank of England - follows pressure from both inside and outside the Bank to promote openness and improve accessibility.

At the request of Select Committees in both the Commons and the Lords, the Bank is also to release a short paper explaining the way it believes changes in interest rates - the main tool of economic management used in Britain - impact on inflation and economic growth. The paper, called "The Transmission Mechanism of Monetary Policy", provides one of the most clear insights to date of the thinking of the MPC. It explains how interest rate changes can have an immediate effect on variables such asbond and equity prices, market confidence and exchange rates, and how movements in these variables eventually affect both output and inflation. One of the paper's key contentions is that changes in interest rates affect economic growth long before they feed through into inflation. A movement in interest rates can affect growth almost immediately, according to the Bank. But it may take at least a year before there is any appreciable effect on inflation. Moreover, a temporary change in interest rates may only have a short- lived effect on output, the paper says, but can affect the inflation rate for many years. Applying this logic to recent aggressive cuts in UK interest rates, we should soon expect to see definite signs of an upturn in economic growth. However, the flipside of recent interest rate cuts - a resurgence of inflation - may not become apparent until the beginning of next year. Both the paper and the Bank's economic models owe far more to contemporary economic thinking than to the traditional monetarist doctrine pursued after Margaret Thatcher swept to power in 1979. …