At its meeting of Tuesday 15th July, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended that Bank Rate should be raised on Thursday 7th August, including five votes for a rise of 1⁄2%.
Those urging a rate increase took the view that with GDP growing strongly, then even though inflation is low and monetary growth weak, the case for emergency interest rates has lapsed and there should be some normalisation. They viewed with scepticism the idea that rate rises would seriously derail the recovery, with some members doubting whether initial rate rises would be reflected in rises in the structure of market rate to any significant degree. One member (switching from a hold to a raise vote) noted the growth in aggregate lending in the second quarter of 2014 took it to a five year high.
Those urging rates remain unchanged felt there was no urgency about raising rates and if inflationary pressures or credit or asset price bubbles do in due course emerge, there would be time and scope to raise rates in response. They were sceptical about the view that keeping rates near zero for an extended period is intrinsically damaging to growth or financial stability. Their view was that rates will rise eventually, but there is no reason to raise them yet.
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 31st August and 5th October, respectively.