Continue QE argue SMPC majority - November 2009

Majority vote for QE extension but reservations expressed by some members

Following its latest meeting, the IEA’s Shadow Monetary Policy Committee (SMPC) voted by eight votes to one to leave Bank Rate at 0.5% when the Bank of England’s rate setters next meet on 5th November. The dissenting vote was to raise Bank Rate immediately to 1%, because of concern that inflationary pressures were building up in the private sector of the economy. When asked to look further ahead, most SMPC members had a neutral bias where Bank Rate was concerned. This was because of the uncertainties involved, which suggested that ‘wait and see’ was the safest option. In contrast, the dissenting SMPC member thought that Bank Rate would need to be raised to 2% fairly promptly. There was a widespread view on the SMPC that quantitative easing (QE) needed to be extended for some months beyond November, when new Inflation Report forecasts will be available and the present schedule expires. However, there was disagreement about whether QE should be persisted with in the medium term. Some members were keen to stick with QE until the underlying growth of core broad money – the so-called M4X – was rapid enough to ensure recovery. However, others thought that QE should be terminated after one final tranche because of the inflation risks involved if it was continued for too long.

Several SMPC members thought that the official growth figures were unreliable and likely to be revised. One member was concerned that regulatory proposals to increase bank capital and liquidity would cause commercial bankers to cut back their balance sheets in anticipation, leading to a renewed collapse in money and credit and a second leg to the downturn.

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