IEA Shadow Monetary Policy Committee unconvinced by forward guidance

Leading economists critical of forward guidance policy

In its most recent discussion, finalised on 27th August, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) decided by five votes to four that Bank Rate should be raised on Thursday 5th September. Three members wanted an increase of 1⁄2%, while two advocated a rise of 1⁄4%. This split vote for a rate hike would imply a rise of 1⁄4% on normal Bank of England voting procedures. However, a substantial minority of four SMPC members believed that Bank Rate should be held at its present 1⁄2%, although most members did not wish to see an immediate addition to the stock of Quantitative Easing (QE). The upwards revised second quarter UK growth figures, and the somewhat improved prospects for the Euro-zone, indicated that the pace of UK recovery was quickening. However, there was disagreement as to how long this could continue.

In contrast to the Monetary Policy Committee (MPC) minutes, the SMPC report contains individual and named contributions. It is significant, therefore, that several SMPC members independently expressed serious reservations about the Bank of England’s 7th August paper on forward guidance. These ranged from fears that the Bank’s theoretical model was gravely flawed, to issues of practical implementation, including whether a lagging labour market indicator of the business cycle represented an appropriate threshold for re- considering Bank Rate. One danger of using a lagging indicator was that policy might end up doing too little too late – or too much too late – and create accelerating inflation or worsening boom-bust cycles.

On release of the SMPC's minutes, Professor Philip Booth, Editorial Director at the Institute of Economic Affairs, said: 

“It is very noteworthy that a number of leading economists represented on the SMPC were independently highly critical of the policy of "forward guidance" recently announced by the Bank of England.

“Concerns ranged from fears that the Bank of England’s theoretical model was gravely flawed, to issues of practical implementation, including whether a lagging labour market indicator of the business cycle (unemployment) represented an appropriate threshold for re-considering Bank Rate. One danger of using a lagging indicator was that policy might end up doing too little too late – or too much too late – and create accelerating inflation or worsening boom-bust cycles.”

The minutes of the SMPC attribute comments directly to the individuals who made them and all the comments on forward guidance are in the attached minutes.

Notes to Editors:

To arrange an interview with an SMPC member or IEA spokesperson, please contact Stephanie Lis, Communications Officer: 0207 799 8900 or 07766 221 268.

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.

Current SMPC membership:

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other members of the Committee include: Roger Bootle (Capital Economics Ltd), Tim Congdon (International Monetary Research Ltd.), Jamie Dannhauser (Lombard Street Research), Anthony J Evans (ESCP Europe Business School), John Greenwood (Invesco Asset Management), Graeme Leach (Institute of Directors) Andrew Lilico (Europe Economics), Patrick Minford (Cardiff Business School, Cardiff University), Akos Valentinyi (Cardiff Business School, Cardiff University), Peter Warburton (Economic Perspectives Ltd), Mike Wickens (University of York and Cardiff Business School) and Trevor Williams (Lloyds Bank Wholesale Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that exactly nine votes are always cast.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.

Invest in the IEA. We are the catalyst for changing consensus and influencing public debate.

Donate now

Thank you for
your support

Subscribe to
publications

Subscribe

eNEWSLETTER