SMPC members warn of excessive bank regulation and rising government spending - January 2010

Bank capital regulations may blunt QE

In its latest poll, the IEA Shadow Monetary Policy Committee (SMPC) voted by eight votes to one to leave Bank Rate at the 0.5% originally set in March 2009 when the Bank of England’s rate setters next meet on 7th January. The dissenter voted to raise Bank Rate to 1%, because the era of very low interest rates and supercharged bank profits had outstayed its welcome in his view. When asked to look further ahead, most SMPC members had no marked bias where Bank Rate was concerned. This was largely because of the uncertainties involved. In contrast, the dissenting SMPC member thought that the official discount rate would need to be raised again. Another member thought that Bank Rate should probably be raised to 1% in February, when a new set of Inflation Report forecasts would be available to the monetary authorities.

The previous SMPC vote had been released before the 9th December Pre-Budget Report. Several members of the shadow committee expressed disquiet about the fiscal backdrop to monetary policy. One member pointed out that the government’s intention to spend 53.2% of factor-cost GDP in 2009-10 and 53.6% in 2010-11 pushed the general government spending ratio to well above the 46?% recorded in the 1916-18 period, when World War I was at its peak. It was hardly surprising that spending on this scale gave rise to unprecedented peacetime budget deficits and the economic and financial strains that traditionally epitomized wartime finance. Some SMPC members were concerned that current official proposals to force banks to hold more capital and liquidity would perversely reduce the supplies of money and credit. There was little to be gained from employing such a controversial technique as Quantitative Easing (QE) if the benefits were going to be nullified by negative regulatory shocks to the supply of broad money.