Inside the Room Where 9 People Decide the UK’s Interest Rate
Making Money
This episode features an in-depth interview with Dr. Swati Dinesra, an external member of the Bank of England's Monetary Policy Committee, regarding
Key takeaways
- Dr. Swati Dhingra is one of nine members on the Monetary Policy Committee, which consists of five internal and four external members.
- The Bank of England's primary target is to maintain inflation at a 2% rate to ensure price stability.
Main topics
- Monetary Policy Committee voting process
- Inflation targeting and price stability
Notable quotes
Our interest rate policies don't work so quickly that if we move them today, tomorrow they'll have an impact on inflation.
Conclusion
The episode provides a valuable behind-the-scenes look at the high-sta
Transcript preview
Speaker 3 (0:01) Our sponsor today is Take the Next Step Invest. Inflation is a funny concept. It can be really difficult to really internalise because it normally happens in small enough increments that we don't really notice it. The price of something in a supermarket goes up by 15p. But inflation is one of the most corrosive forces in finance. It's been brought home by the cost of living crisis in recent years because the price jumps have been so drastic. The best lever that most people have to outrun inflation is investing. So if you have solid savings and money you won't need for the next five years, then think about it. Take the next step. Invest. One of the Bank of England's key targets is to keep inflation, which is the rate at which prices rise, at 2%. The idea really is that they'll increase interest rates, so that makes things like borrowing more expensive, so your mortgage, and also encourages people to save, which stops them from spending in the economy, and that helps reduce price inflation. That is at least a theory anyway. Dr Swati Dhingra is an external member of the Bank of England's Monetary Policy Committee. That makes her just one of nine people who decide what the interest rate should be. How did you get that job? Speaker 1 (1:09) I got a phone call one day asking me to apply. My first reaction was, but I'm not a monetary economist, why do you want me? And the key point was that a lot of the big shocks that have happened in the UK economy in the recent past have been things that have come from outside, external factors like the oil crisis, like the cost of living crisis before that. And that's really where my training is, which is in international economics, as well as broadly thinking about supply chains. And I hope I've brought some of that expertise to the committee. Speaker 3 (1:37) Okay. The most recent decision was to hold the rate at 3.75%. And when we say decision, it wasn't your decision. It's a vote of those nine people, right? So we would like to go through that process, if that's okay, and just get a better understanding of how that works. I want to start with... When do you start considering the next decision? So Speaker 1 (1:59) if you really wanted from the very start, the day the... when actual vote happens, which is when you sort of the next day you hear the announcement, that very day we start to think about what are the key issues that are going to be important for consideration in the next round, because a lot of the conversations already happened. You're starting to see where the economy is headed. So the key question is, can we try and put in place all of the research that could be done early on to be able to get us prepared for the next meeting? Typically, of course, things change in the matter of those six weeks. So it's not as though you can be foolproof with that kind of planning, but at least you can try and put some of the key aspects in place. Then come about three meetings. The first meeting is one where the bank staff take us through a pre-monetary policy committee round, which is to say that we get updated on all of the various economic statistics that have been updated over those six weeks that we've been away. We then get another more sort of substantive meeting where we discuss what should be the policy stance going forward, probably even try to think about where things are headed in the next, say, not just six weeks, but a longer period of time over the year. And then finally, we get to a point where we put in our indicative vote and the Wednesday before the actual announcement day, which is Thursday, we put in our final vote. And that's when everything starts to come to a close, which is that we... work out what the announcement should look like, what should be communicated to the financial markets as well as our other stakeholders. And then we basically on Thursday make the announcement. Speaker 3 (3:32) And you said the key information that might influence the decision you're provided with, what are some of the key metrics or markers that you're looking at? Speaker 1 (3:41) So it typically starts with financial markets where we get an update on what's happened to, say, your mortgage rate. Has that changed over the last few months or not? And what is the path of it? Then we also get updates. And, you know, for right now, what is, of course, really important is energy prices. And where do energy experts think those prices are headed? And then so on and so forth. Then we go over to the domestic economy. So we look at... all sorts of prices, whether that's what consumers have to pay, what businesses are charging each other, and then get to the point where we start to look at, you Speaker 2 (4:12) know, the Speaker 1 (4:12) real economy activity side of things, which is to say GDP, employment, what is happening there, what are some of the key issues that might be going on right now? For example, youth unemployment was a big issue recently. dig a bit deeper into some of those questions. And the key point of doing all of this is to be able to have a very informed view of where we think the economy is headed. You know, it would be very easy. Our jobs would be really easy if all we had to do was look at the current inflation number and then set the interest rate. But that's not the luxury we have because we're trying to do something for, say, one and a half, two years down the line. Our interest rate policies don't work so quickly that if we move them today, tomorrow they'll have an impact on inflation. That takes a fairly long time, so we need to be prepared for where things are going to be. say, one and a half to two years down the line. Typically, we're thinking of a three-year horizon. So that's what makes it harder, because now you've got to start making those judgment calls about where do I think the economy is going to be? Where is unemployment going to be in that one and a half years? Am I setting interest rates too high that the economy is getting more contracted, and therefore those bad things that we don't want are happening even more? Or am I trying to keep it under check in terms of inflation, that prices shouldn't rise too fast? And if all of us start chasing the same goods a few, you know, a few set of goods, we're going to drive prices up. So those are the kinds of judgment calls you're having to take. And they're not foolproof. None of us can predict the world perfectly, but we try to bring the best evidence and the best judgment to be able to do that. Speaker 2 (5:43) That's a very thorough process. How long does it take you to make a decision, to make the decision? Speaker 1 (5:50) I think I spend about six weeks mulling over it almost every day till it gets to that point when the final vote has to be cast. Some are easier decisions and some tend to be harder decisions. So I think what we're dealing with right now is particularly difficult because we don't really have a very clear understanding of where energy prices are going to land, how long they're going to stay up. That's just something totally out of our control. It's driven by geopolitical events. And in some sense, we're going to have to react to those geopolitical events without perfect knowledge of where those things are headed. So I think those periods become particularly difficult. And there's a lot of back and forth that we have with each other amongst ourselves, as well as, you know, thinking through it from different points of view. Speaker 3 (6:30) There's two things I want to pick up on in there. So the first of all, you said that our interest rate decisions don't feed into the economy for, say, 18 months. So why would you meet so frequently and change interest rates? Why do you do it so often? Speaker 1 (6:43) That's a really good question. And so one way of thinking about it is, We meet every six weeks because the economy is changing in those six weeks. So you can adjust your policy decision accordingly. That's one aspect of it. The second aspect of it is that when you're meeting, when you set an interest rate. you don't really typically want Speaker 2 (7:05) to move in big chunks. So Speaker 1 (7:06) if you think that the economy is evolving in a different way from where you were, say, a few weeks before, a few months before, you don't want to do it all in one go because that doesn't prepare businesses and consumers and households to be able to take account of the policy decisions that you're making. So having a somewhat gradual process, I am very in favor of that because I think it lets people plan. And that's really what we're trying to do. We're not trying to immediately change. things tomorrow. We are trying to ensure that the economy is on the right trajectory. Speaker 3 (7:35) You just guide it, essentially. Do you think then that the rapid interest rate rise, say 2021, beyond there was too quick, that we should have maybe smoothed that path out a little bit? Speaker 1 (7:46) I think there were moments where I disagreed with the committee, and I thought that we should have gone slower, largely because there was so much happening that we understood very little about when the economy was recovering from the post-pandemic shock. you know, we saw dynamics that we had not seen before, at least not most of us in our recent lifetime have not seen the economy being locked down. So in that sense, I thought some moments there, we could have gone a bit slower than we needed to. But of course, you know, others thought that we might lose control if we don't act fast enough. So I think those were the judgments that were going in at the time. I'm generally of the view that I think slower decisions typically tend to focus on what are the low frequencies, slow moving things, which is the stuff we're trying to impact. Speaker 3 (8:31) Okay, perfect. Thank you. We're going to talk more about the impacts of the decisions later on. I still want to focus on the room because I find it quite fascinating that essentially nine people, it's the most important financial decision that you make. It leads the country's economy, it affects people in all kinds of ways. And it's just nine people that have got to go into a room and agree. How is that room? Speaker 1 (8:53) Dark. Like Speaker 2 (8:55) actually, dark, light or like the vibe. It's just the back of England, right? So Speaker 3 (8:58) it's all a bit dingy inside. Speaker 1 (9:00) Yes, of course. So the building itself is absolutely gorgeous. If any of you want to go see it, there are tours that are done and it's John Soane's building. But the room that we tend to sit in has... Not the best acoustics. It's dark. Not a single window is open because these are supposed to be private meetings that we, you know, we don't want others getting to know what the decision might look like. Speaker 3 (9:23) So Speaker 1 (9:23) it's a Speaker 2 (9:24) somewhat grim environment. Speaker 1 (9:28) It's a very British institution. Even if we're very upset and angry with each other's decisions, we will still, of course, pretend we're not and carry on. But I think that's the strength of the system. The fact that we feel... that we can disagree even with the governor who is the one proposing, giving you the proposition for that month. I think that is a real specific strength of the UK system, which doesn't exist in, say, the European Central Bank or the Federal Reserve of the United States. And I think that diversity of view really is what enriches the discussion. There are people who really come purely from financial markets. There are people like me who've never worked in financial markets, but come from academia and bring a completely different viewpoint. And I think that's the kind of debate which lets us hopefully make much more robust decisions. Speaker 2 (10:16) How many disagreements are there? Is it like the House of Commons when everyone's like jeering or is it more chill down? You're like, I don't agree with you. Or do you guys start calling each other names and things? get across these disagreements? I Speaker 1 (10:27) think mostly these are seasoned civil servants and it's a very civilised conversation, even when we're not in agreement at all. I think, of course, you know, we all care about the job we're doing. We understand that these are nine people setting a policy decision that will impact almost everybody in the UK. So we understand how important that decision is. So then, of course, sometimes people will get more upset about, you know. aspects that they think should have been taken into account and others might not agree with those. So I think there'll be a few raised voices, but I think overall it's a fairly civilised process. Speaker 3 (11:00) So a number of the members of the committee are external and then a few work in the bank. Is it five are from the bank? Speaker 1 (11:06) Five Speaker 3 (11:06) are internal Speaker 1 (11:07) and four external. Speaker 3 (11:08) Do you not get like a groupthink that can occur from those five being, they have the commanding vote essentially? Speaker 1 (11:15) So I think that was actually one of the main reasons why the four external members were brought in. There is a tendency, as with any big organization, that you tend to become inward looking because that's really the environment you're operating in. And I think if you see how over the last few years, I'm always reminded by the Treasury Select Committee when I go to Parliament for hearings, that I'm... overwhelmingly in the dissenting minority. But I have never for a single day felt like I was, you know, that I couldn't make that decision. I could disagree. And I think that's really why, you know, it's a very good mechanism to try and prevent groupthink from happening. Speaker 3 (11:55) Yeah. And the votes that occur across those five people, do they tend to vary or do they tend to vote in a block? Speaker 1 (12:03) They do tend to vary. And in fact, the chief economist has been voting. differently from, say, the governor. So I think there is a mix of views. And I think when you listen to the conversations, the debates that happen around which way the policy path should be, there are many times when I have heard, you know, some of the internal members bring up points that I had not thought of, and that would make me change my view as well. What time of day do you vote? Afternoons, typically. Do you get a good lunch beforehand? No, there is no lunch. There's some custard cream biscuits and tea. It's Speaker 2 (12:34) very Speaker 3 (12:34) British. Have you seen the judge study? You know, that you don't want to go before a judge before lunch because he'll throw the book at you because he's hungry. It's a bit like that, right? Maybe they should take you down the net or something. And the next time more Speaker 1 (12:46) people might vote along with me. Yeah, yeah, yeah, yeah. Speaker 3 (12:49) Have you ever walked in thinking you were going to vote one way and been swayed by a conversation in the room? Are you normally pretty firm, like, no, I'm going this way by that point? Speaker 1 (12:59) I think by the time we are actually going to cast a vote, most people have seen enough material and thought about it enough that we would typically stick to our votes. There have been a couple of times when I've actually said that I wouldn't vote immediately and I would actually wait almost for the last minute to be able to make up my mind. And at those points, I have heard what are the arguments that others are making to be able to... you know, come to a conclusion as to what would be the precise vote I would cast. Speaker 3 (13:26) And when you cast a vote, is it like you stand up and you go, I am voting this way because of these reasons? Or is it like a secret ballot? Speaker 1 (13:34) No, it's actually quite open that the governor proposes, makes a proposition, for example, you know, that interest rates should stay on hold like this time. And then we just go around the room almost randomly based on where somebody is sitting or based on some kind of where Teams is showing their names appear. And we just go around and say whether we support the proposition or not and what would be the alternative that we undertake if we do dissent. Speaker 3 (13:59) Okay. You Speaker 2 (14:00) guys are like a super jury because you're responsible for not one person's life like a jury, but so many people's lives. Do you feel the pressure ever with the deliberating and changing your mind? Speaker 1 (14:12) One of the things that we do is go on regional visits across the country. And I've always made it a point to meet both businesses as well as communities, which means a lot of the times that would be third sector groups on the community side, or there would be citizens panels. And when you're standing there in front of people having to justify why you voted in a certain way, or having to justify why inflation is or isn't under control. Those are moments when you understand the gravity of the decisions you're making. And I think And it's also a point where you know that there are a lot of people whose lives you're affecting. So you take everything that you do more seriously just because you've had that very visceral moment of interacting with people who are impacted by it. Speaker 3 (14:57) So Swati, you've said a couple of times that you dissenters and you vote the opposite way to other people. But then once the vote is cast, you must have to represent that decision. So you must have to go to these regions and speak to people and basically justify a course of action that you don't necessarily agree with. How do you do that? Speaker 1 (15:16) It's often quite difficult to do that. I think the way I've manoeuvred through that is to say, here's what the central view is. And the reason that is the central view is because... Many of these decisions are not hard and fast that we know precisely how the economy is going to unfold in the next 18 months and why is there that divergence of views. So I would typically lay out the divergent views and then be pretty candid about, you know, the reason I disagree is because I give more weight to certain other pieces of evidence. And that's worked fairly well. And I think most reasonable people understand. that there can be these kinds of divergent views. And I think that's really what our job is, to be able to say why we're doing things the way we are, even if that may or may not agree with other people's views. 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