In its poll closing Wednesday 28th May, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended by five votes to four that Bank Rate should be raised 1⁄4% on June 5th, including four votes for a rise of 1⁄2%.
For those members advocating a rise, the return of strong economic growth implied that the need for emergency levels of low rates had passed, that there was the danger that sustaining such low rates would eventually drive a rapid expansion in credit (though it was acknowledged that credit is not in boom yet), and that the period of extremely low rates had distorted the supply-side of the economy in ways that have damaged productivity and might limit the ability of supply to respond quickly to the recovery in demand. For several of them, interest rate normalisation is being, as one put it, “neglectfully delayed”. Conversely, the idea that credit pressures or rapid house price rises should be contained by regulation was seen as wrong. Prices and interest rates, not regulation, should discipline demand and risk- taking in a market economy.
Those advocating holding rates noted that monetary growth is modest; credit is stagnant or even contracting; inflationary pressures are low, and the sectoral picture for real economy growth is patchy and insecure. In their view there was no urgency to raise rates but there would be risk – the risk of derailing the recovery just as it began.
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. To ensure that nine votes are cast each month, it carries a pool of ‘spare’ members. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. As a result, the nine independent and named analyses should be regarded as more significant than the exact overall vote. The next two SMPC e-mail polls will be released on the Sundays of 6th July and 3rd August, respectively.