SMPC votes to cut rates by 0.5% - November 2008

Members expect inflation to fall quickly

At its latest (14th October) meeting, the IEA’s Shadow Monetary Policy Committee (SMPC) voted overwhelmingly to cut Bank Rate by 0.5% from its current 4.5% level. Though the committee supported an immediate reduction in rates, several members expressed concern as to whether rate cuts on their own would have a significant affect on the real economy. It was suggested that other monetary implements should have been available to the Bank of England at an earlier stage and that the tripartite dismemberment of the Bank in 1997 was one cause of the problems facing the authorities. The Bank is trying hard to stave off a recession but its official REPO rate has apparently turned out to be unfit for purpose. However, most of the other potential policy implements, including funding policy, had been taken from the Bank in 1997.

Adjusted broad money supply measures, which had been growing strongly as a precursor to the lending boom and subsequent inflation, were now declining. Members were extremely pessimistic about the medium-term prospects for the economy and expected inflation to fall quickly. Those who voted for the 0.5% cut had a bias to cut further in the future or wanted a bigger immediate cut in rates.

There was some dissent from the majority position and much concern about both the government’s fiscal position and current inflation. The Chairman, David B. Smith, advising caution in cutting rates further, commented: “By easing monetary policy at a time inflation was above target, accelerating, and had consistently proved higher than the Bank of England had anticipated, we were coming dangerously close to junking the inflation targeting framework without putting anything in its place.”