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 to raise interest rates by seven votes to two. A vote to raise rates by 0.5% was lost by five votes to four.
The majority of SMPC members were concerned about the medium-term growth in broad money, which, they believed, has caused the recent rise in CPI inflation to above 3%. It was noted that inflation as measured by the old RPIX target measure was even higher than CPI inflation.
Members believed that the Bank of England risked a serious breach of credibility if it did not act decisively to steer inflation back towards the 2% target. Though, in the short run, inflation would fall, the current lax monetary conditions did not bode well for the medium term. Professor Anne Sibert, in voting for a 0.5% rise said, Most of the recent news has pointed in the direction of higher inflation. A 0.25% rise was justified last month; given that did not happen, there needs to be a 0.5% rise now. Gordon Pepper argued that the monetary authorities had done too little, too late and commented that the Bank should now act decisively.
Both Patrick Minford and Peter Warburton wanted interest rates to stay on hold. They believed that less attention should be paid to current inflation and the monetary background and more to potential weaknesses in the economy. They felt that the occasional breach of the inflation target should not be regarded as constituting a crisis.
The Governors letter to the Chancellor of the Exchequer also came in for criticism. John Greenwood, Chief Economist at Invesco, commented that the letter stressed changes in relative prices and gave comparatively little attention to the underlying medium-term causes of inflation.