HM Treasury

UK economy

Monetary policy in the UK

On 24 March 2010, the Chancellor wrote to the Governor of the Bank of England restating the monetary policy remit.

On 16 February 2010, the Government published an exchange of letters between the Chancellor of the Exchequer and the Governor of the Bank of England. The Remit for the Monetary Policy Committee (MPC) requires the Governor to write to the Chancellor if inflation deviates from the 2 per cent target by more than one percentage point. On 15 February 2010, the Governor wrote to the Chancellor explaining the reasons why CPI inflation for January 2010 moved away from the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor replied on 16 February 2010.

On 6 August 2009 and on 5 November 2009, the Government published letters exchanged between the Chancellor of the Exchequer and the Governor or the Bank of England which authorise the Monetary Policy Committee (MPC) to increase the ceiling on the scale of assets that can be purchased through the Asset Purchase Facility and financed through reserves at the Bank of England. The Asset Purchase Facility, which was announced on 19 January, sets out a framework which the MPC can use for monetary policy purposes. The Governor set out in a letter to the Chancellor on 17 February 2009 the MPC's case for using the Asset Purchase Facility for monetary policy purposes and financing those purchases through reserves at the Bank of England. The Chancellor replied to the Governor on 3 March 2009 to authorise this action.

On 4 February 2010, the MPC announced that it would not be undertaking further purchases financed by the issuance of reserves at the Bank of England.  However, the Asset Purchase Facility will continue to offer facilities for commercial paper, corporate bonds, and secured commercial paper.  Future purchases of these assets will be financed by the issuance of Treasury Bills, as set out in the Chancellor's letter to the Governor of the Bank of England of 29 January 2009.    

On 22 April 2009, the Chancellor wrote to the Governor of the Bank of England restating the monetary policy remit.

The Government is today publishing letters exchanged between the Chancellor of the Exchequer and the Governor or the Bank of England. The Remit for the MPC requires the Governor of the Bank of England to write to the Chancellor if inflation deviates from the 2 per cent target by more than one percentage point.

The Government published letters exchanged between the Chancellor of the Exchequer and the Governor or the Bank of England which authorise the Monetary Policy Committee to purchase assets financed through reserves at the Bank of England.

The Asset Purchase Facility, which was announced on 19 January, provides a framework that the MPC can use for monetary policy purposes. The Governor set out in a letter to the Chancellor on 17 February the MPC's case for using the Asset Purchase Facility for monetary policy purposes. The Chancellor replied to the Governor on 3 March to authorise this action. 

The Remit for the MPC requires the Governor of the Bank of England to write to the Chancellor if inflation deviates from the 2 per cent target by more than one percentage point.

In November 2008, the CPI figure, while falling from 4.5 per cent in October to 4.1 per cent, remained above 3 per cent, and the Governor published an open letter to the Chancellor at 10:30 on 16 December 2008, explaining the reasons why inflation remained more than one percentage point above the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor published a letter to the Governor at 10:30am on the same day.

In August 2008, the CPI figure remained above 3 per cent, and the Governor published an open letter to the Chancellor at 10:30 on 16 September 2008, explaining the reasons why inflation remained more than one percentage point above the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor published a letter to the Governor at 10:30am on the same day.

In May 2008, the CPI inflation figure exceeded 3 per cent, and the Governor published an open letter to the Chancellor at 10:30 on 17 June 2008, explaining the reasons why inflation moved away from the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor published a letter to the Governor at 10:30am on the same day.

In March 2007, the CPI inflation figure was 3.1 per cent, and the Governor published an open letter to the Chancellor at 10:30 on 17 April 2007, explaining the reasons why inflation has moved away from the target, the policy action being taken to deal with it, and the period within which the MPC expects inflation to return to target. The Chancellor published a letter to the Governor at 10:30am on the same day.

On 12 March 2008, the Chancellor wrote to the Governor of the Bank of England restating the monetary policy remit.

The Chancellor announced on 10 December 2003 the operational target for monetary policy will with immediate effect switch to a target based on the Consumer Prices Index (CPI). The level of the new (CPI) inflation target is being set at 2 per cent. All other aspects of the framework have remained the same.

The monetary policy framework (PDF) is designed to promote economic stability by delivering low and stable inflation. This objective is shared with the new fiscal policy framework and involves effective co-ordination between fiscal and monetary policy(PDF). The monetary framework is founded on the Government’s view that price stability is the essential foundation for high and stable levels of growth and employment, and that in the long run there is no trade-off between inflation and output and employment.

Its key features are:

Monetary Policy Committee

Under the new monetary policy framework the Monetary Policy Committee is entrusted with the responsibility of choosing the appropriate level of interest rates to meet the Government’s price stability objectives. The MPC meets on a monthly basis and decisions are made by a vote of the Committee on a one-person one-vote basis. It is made up of 5 senior Bank officials and four independent experts appointed by the Chancellor. Treasury has the right to be represented in a non-voting capacity with an observer attending the meetings.

Documents relating to the MPC's remit are available below in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website. For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.

Co-ordination between monetary and fiscal policy

The fiscal and monetary frameworks are characterized by high levels of openness, transparency, and accountability. As Government sets both objectives, co-ordination between both arms of macroeconomic policy has been enhanced. A recent paper by HM Treasury suggests that the new framework is better co-ordinated than the previous arrangements where the Chancellor set both UK interest rates and fiscal policy.

Key documents on the Monetary Framework

External links on Monetary Framework

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