Following its most recent quarterly gathering, held at the Institute of Economic Affairs (IEA) on 9th July, the Shadow Monetary Policy Committee (SMPC) decided by six votes to three that Bank Rate should be raised on Thursday 1st August. Five SMPC members wanted an increase of ½%, another voted for a ¼% increase, and three voted to hold Bank Rate. This vote distribution implies a ½% increase on normal Bank of England voting procedures. Although opinions differed on many issues, there was broad agreement on the shadow committee that over-regulation of the financial sector was a clear and present danger to the UK economic recovery.
The six that wanted to raise rates cited a variety of reasons. Broadly, one was that monetary policy was ineffective with interest rates at these levels and a rise was required so that a cut to help ward off a future crisis, such as one in the euro area, would be possible. Another reason was that with inflation exceeding its target for so long, the Bank of England ran the risk of being seen to be not serious about the inflation objective. This is linked to the point that inflation was the Bank’s target not growth, and if the latter was the target, then the policy had not worked since the recovery remained feeble. The third broad final point of those wanting a rate rise immediately was that monetary policy cannot solve the real problem of the economy, which is a supply side one. The three dissenters argued that the time was not yet right for a rate rise and the risk of triggering a further crisis was simply too high at this point. Forward guidance was seen by some as a target and not as policy, and there were doubts about how effective it would be without some supportive policy action from the Bank of England.
The SMPC is a group of economists who have gathered quarterly at the IEA since July 1997. That it was the first such group in Britain, and that it gathers regularly to debate the issues involved, distinguishes the SMPC from the similar exercises carried out elsewhere. Because the committee casts precisely nine votes each month, it carries a pool of ‘spare’ members since it is impractical for every member to vote every time. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. The nine independent analyses should be regarded correspondingly as more significant than the exact vote. The next two SMPC e-mail polls will be released on the Sundays of 1st September and 6th October. The next quarterly SMPC gathering will be held on Tuesday 15th October and its minutes will be published on Sunday 3rd November.