The House of Lords have criticised the Treasury for producing "over-optimistic" forecasts which is making it "more difficult than it needs to be" for the Bank of England to set interest rates.
A report published today by the House of Lords Economic Affairs Committee, on ‘The Current State of Monetary Policy’ also recommends the Bank of England should carry out more research into the link between rising house prices and consumer spending.
The Committee, which includes two former Chancellors - Lord Lamont and Lord Lawson, states the over optimistic growth forecasts over the last five years has led to under-estimates of the budget deficit and borrowing requirements.
As a result the report argues this situation has been unhelpful in setting interest rates and suggests this may have contributed to increases in the interest rate, once the true picture became clear to the Monetary Policy Committee (MPC).
In addition the report looks into the effect of house prices on inflation, as it notes Mervyn King, governor of the Bank of England, told the Committee in his evidence for the report, that while the MPC considers house prices when assessing the outlook for inflation it does not try to influence them.
However the Committee points out in the document that the relationship between rising house prices and general inflation is not well understood, and so suggests the Bank of England should spend more time looking at this issue.
It recommends the Bank should “undertake extensive research on the link between house prices and consumer spending to establish a better understanding of the issue and to ensure the decisions of the MPC are made with the best available knowledge”.
Meanwhile the report also raises concerns about the way members are appointed to the MPC, arguing the process, which sees external members appointed solely by the Chancellor, is “shrouded in mystery and may not always result in the most suitable appointments”.
It claims new members are increasingly lacking previous experience in monetary economics, and among its recommendations it suggests for external members a single term of service should be increased from three to four years and that the selection process should be made more transparent.
Lord Wakeman, chairman of the Committee, says while it congratulates the Bank and the MPC for continuing to conduct monetary policy with considerable success, he says there are several areas where it is felt there task is being made more difficult than it needs to be.
He adds: “The over-optimistic predictions for growth that have consistently been produced by the Treasury have masked the true budgetary position and made it harder top make accurate judgements about interest rates. The Treasury should give priority to achieving greater accuracy in its growth focus.”
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