Halifax: The MPC's 10th anniversary

The Bank of England will be celebrating the tenth anniversary of being granted operational responsibility for setting and controlling interest rates on 6th May.

The MPC met for the first time on 6th June 1997 when it raised rates from 6.25% to 6.5%. Halifax has analysed the behaviour of interest rates and inflation over the past ten years and examined the voting patterns and the stances of both internal and external members of the Committee.

The Bank of England will be celebrating the tenth anniversary of being granted operational responsibility for setting and controlling interest rates on 6th May.

Halifax has analysed the behaviour of interest rates and inflation over the past ten years and examined the voting patterns and the stances of both internal and external members of the Committee.

The key findings are:

Interest rates have changed less frequently than in the preceding ten years.
Interest rates have been lower and fluctuated within a narrower range during the past decade compared with the previous ten years.
Inflation has also been lower and less volatile in the past ten years compared with the previous decade.
MPC leaves rates unchanged at seven in ten meetings.
Seven of the 34 – more than one in five - rate changes occurred in 2001.
The majority of rate changes have been in Inflation Report months.
Voting has been unanimous at almost one in two MPC meetings.
External members are more likely than Bank members to vote for a rate change.

Interest rates have changed less frequently than in the preceding ten years.

Official rates have moved on 34 occasions since the MPC first met in June 1997 compared with 46 changes in the previous decade.

Interest rates have been lower and fluctuated within a narrower range during the past decade compared with the previous ten years.

Official interest rates have varied between a high of 7.50% in 1998 and a low of 3.50% in 2003 since June 1997. During the decade up to the formation of the MPC, base rates peaked at 15% during October 1989 to October 1990 – twice the peak in the past ten years - and fell to a low of 5.25% during 1994.

Inflation has also been lower and less volatile in the past ten years compared with the previous decade.

The annual rate of headline Retail Price Index (RPI) inflation has averaged 2.7% over the ten years of Bank of England independence. This is nearly two percentage points below the 4.5% average during the ten years before the MPC was formed. Whilst the annual rate of RPI inflation is currently at its highest in the last ten years, at 4.8%, it is nonetheless substantially lower than the 10.9% peak recorded in the previous decade.

Interest rate decisions

MPC leaves rates unchanged at seven in ten meetings.

In the 120 meetings to date, interest rates have been unchanged on 86 occasions, increased 17 times and been reduced on 17 occasions.

There has not been a change of more than 0.25% since November 2001.

All 17 rate increases have been by 0.25%. 13 of the 17 rate cuts were by 0.25% with the four exceptions all 0.50% reductions – November 1998, December 1998, February 1999 and November 2001.

Seven of the 34 – more than one in five - rate changes occurred in 2001.

All seven changes were cuts, accounting for more than 40% of the total number of reductions since the MPC took control of interest rates.

There have been four lengthy periods of unchanged rates since June 1997.

The longest was 15 months between November 2001 and February 2003 when rates were maintained at 4%. The other three long periods of stable rates each lasted 12 months between: (i) February 2000 and February 2001, (ii) August 2004 and August 2005, and (iii) August 2005 and August 2006.

The Influence of the Quarterly Inflation Report

The majority of rate changes have been in Inflation Report months.

More than half (18 out of 34) of the changes made to interest rates since 1997 have occurred in months when the Bank of England has published its quarterly Inflation Report.

It has become more common for the MPC to change rates in Inflation Report months.

Eight of the 11 (nearly three-quarters) rate changes since the beginning of 2003 have been in Inflation Report months.

Unanimous Voting

Voting has been unanimous at almost one in two MPC meetings.

The MPC members have voted unanimously on 53 out of 120 occasions. Of these 53, 32 were for holds in rates, 10 were for increases and 11 were for rate reductions.

But unanimous voting has become less common in recent years.

There were 31 unanimous votes in the first 60 MPC meetings compared with 22 unanimous votes in the last 60 meetings.

External v Internal Members

External members are more likely than Bank members to vote for a rate change.

43% of all the votes cast by external members during the 120 meetings have been for a rate change compared with 31% of votes cast by internal members.

Former external member, Willem Buiter, has the record of voting for a rate change at the highest proportion of meetings attended* - 75% (27 out of 36).

Current external member, Tim Besley, has been the second most active member, voting for a rate change at 63% (5 out of 8) of the meetings attended.

* Footnote: Howard Davies who attended two meetings in 1997 has been excluded.

Former Bank chief economist, John Vickers, has been the most active Bank member.

John Vickers voted for a change at 61% (17 out of 28) of the meetings attended.

Current external member, David Blanchflower, has voted for a rate change at the lowest proportion of meetings attended; 9% (1 out of 11).

Martin Ellis, chief economist, commented: "The past decade has been a period of remarkable economic stability. Interest rates and inflation have both been lower and varied in a much narrower range since the MPC took over responsibility for setting interest rates than in the previous 10 years.

The MPC members have sensibly opted to keep a steady hand on the tiller at the majority of their meetings. Unsurprisingly, however, the quarterly Inflation Report is often a catalyst for interest rate changes on the Committee's part. The external members have proved their worth by being more likely to vote against a majority."