At its latest meeting, the IEAs Shadow Monetary Policy Committee (SMPC), a group of leading monetary economists that monitors developments in UK monetary policy, voted narrowly to hold interest rates at their current level on 8th May.
Members of the SMPC remained concerned by the problems that had arisen with sub-prime lending. However, whilst some members wanted a reduction in interest rates, others expressed the view that interest rates were not an effective tool for dealing with the serious problems in the UK banking sector. Furthermore, a number of members felt that loosening monetary policy could damage the Bank of Englands credibility given the serious inflationary pressures in the economy
Four members wanted to cut rates, including two who wanted to cut rates by 0.5%. This minority believed that inaction could lead to a crisis in financial markets and that monetary policy was much tighter in effect than was indicated by money supply figures. Roger Bootle commented: we are starting from where we are now, not where we would like to be. Raising rates would compound the policy mistakes of the past. The scale of the risks is so great and the potential outcome so serious that immediate action is needed to stop the financial system from collapsing.
Members also stressed the importance of non-interest-rate measures in the current circumstances. There was general agreement that the Bank of England should provide liquidity to the markets. However, members stressed the crucial importance of mopping up liquidity after the crisis was over, in order to avoid the severe inflationary problems that have appeared after some previous financial markets shocks.