In its most recent poll, finalised on 26th February, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) decided by seven votes to two that Bank Rate should be raised on Thursday 6th March. In particular, five SMPC members voted for an increase of 1⁄2%, two members voted for a rise of 1⁄4%, and two wanted to leave rates unaltered. This pattern of votes would give rise to an unambiguous increase of 1⁄2% on the usual Bank of England voting procedures.
The IEA shadow committee’s rate recommendation contrasts with the view taken by Mr Carney at his 12th February Inflation Report press conference. Individual SMPC members had a variety of reasons for not being persuaded by the Bank’s analysis. However, there was a general suspicion that the concept of ‘slack’ used to justify freezing Bank Rate was so immeasurable in practice that it was incapable of operational implementation. It was also suggested that the Bank’s underlying theoretical model, which justified the emphasis on slack, was itself inadequate as a description of a small, open, trade-dependent economy, with a large socialised sector, and where financial regulation was delivering constant regulatory shocks to the supplies of money and credit. However, some SMPC members felt that it would be desirable to pause and reconsider the process of rate normalisation once the nominal interest rate was in the 2% to 21⁄2% range. There was also a view that the, possibly unrealistic, expectations of Bank Rate stasis created by Forward Guidance meant that any rate increases had to be delivered in a series of small phased doses in order to minimise possible adverse shocks to business confidence.
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. As a result, the nine independent analyses should be regarded as more significant than the exact vote. The next quarterly SMPC gathering will be held on Tuesday 15th April and its minutes will be published on Sunday 4th May. The next two SMPC e-mail polls will be released on the Sundays of 6th April and 1st June, respectively.