SMPC foresees stronger economy but votes 5/4 to hold Bank Rate in October

SMPC 5/4 to hold Bank Rate

In its most recent discussion, finalised on 1st October, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) decided by five votes to four that Bank Rate should be left unchanged on Thursday10th October. Among the dissidents, two members wanted an increase of 1⁄4%, while two advocated a rise of 1⁄2%. There was considerable agreement on the shadow committee that the UK economic recovery had gathered momentum in the second quarter and that the evidence from business surveys suggested that growth might have accelerated in the third quarter, for which there is almost no official data at present.

There were two main reasons why a majority of the SMPC did not want to raise Bank Rate; even if some ‘holders’ believed that a rise might be appropriate in a quarter or two’s time. One reason for holding rates was that there was still significant excess capacity available and that inflation would stay subdued until this was used up. A second reason was concern that the economy had not achieved ‘escape velocity’ and could slow early next year, either for domestic reasons or because of adverse shocks emanating from overseas. These included the fear that the recent Eurozone crisis was dormant – but not dead – and worries over the potential adverse consequences of the fiscal standoff in the US. In contrast, the more hawkish SMPC members thought that the most common error was to underestimate the pace of the upswing at this stage in the business cycle and that recovery was likely to be maintained, unless there was another adverse shock to the money and credit creation process caused by further misguided regulatory attacks on the banking system.