Following its most recent gathering, held at the Institute of Economic Affairs (IEA) on 14th January, the Shadow Monetary Policy Committee (SMPC) decided by six votes to three that Bank Rate should be raised on Thursday 6th February. Four SMPC members voted for a 1⁄2% increase, two members wanted an increase of 1⁄4%, and three wanted to leave rates unaltered. This pattern of votes would deliver an increase of 1⁄4% on normal Bank of England voting procedures.
There were several reasons why a majority of the IEA’s shadow committee wanted to raise rates now rather than wait until the recovery had gathered further momentum. The most important was the belief that starting interest rate normalisation immediately would avoid a damaging over-steer in the opposite direction at a later date. This argument was opposed by some SMPC members, however, who thought that less damage would be done by waiting than by raising rates prematurely. The other main disagreement within the IEA’s shadow committee was over the margin of spare capacity that remained available. The SMPC’s ‘doves’ believed that ample spare resources remained. The ‘hawks’ thought that there had been a major reduction in aggregate supply as a result of the Global Financial Crash and the ‘big government’ policies implemented under Labour and only partially reversed by the Coalition. Two general worries were that: firstly, irrationally onerous financial regulations would restrict banks’ ability to underwrite the recovery through new money and credit creation; and, second, that the financial markets could be de-stabilised by political events such as the European elections, the Scottish referendum and the prospect of a change of British government in May 2015.
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 because it is impractical for every member to vote every month. 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 two e-mail polls will be released on the Sundays of 2nd March and 6th April, respectively, while the next quarterly SMPC gathering will be held on Tuesday 15th April and its minutes will be published on Sunday 4th May.