SMPC members warn of monetary policy dangers - December 2009

SMPC members want to continue QE but warn of serious problems

The Shadow Monetary Policy Committee (SMPC) voted by eight votes to one to leave Bank Rate at 0.5% when the Bank of England’s rate setters meet on 10th December. The dissenting vote was to raise Bank Rate immediately to 1%, because of concern about underlying private sector inflation. When asked to look further ahead, most SMPC members had a neutral bias where Bank Rate was concerned. This was largely because of the uncertainties involved. These meant that policy makers could only cautiously grope their way through the fog of events. In contrast, the dissenting SMPC member thought that Bank Rate would need to be raised again fairly promptly. Another had a bias to tighten if sterling weakened any further.

Some members were very critical of the conduct of monetary policy and also very critical of the government fiscal position. Tim Congdon described UK monetary policy as being in chaos and, amongst others on the committee, believed that misguided bank regulation was destroying broad money.

There was a divergence of views as to whether quantitative easing (QE) should be extended beyond February 2010. Some members of the shadow committee were keen to stick with QE until recovery was assured. However, others thought that QE should be terminated after February, because of the inflation risks involved. One issue was that there seemed to be no accepted explanation of how QE was intended to work in theory. Some Bank officials have argued that its main aim is to support the financial markets, boost household wealth, and allow commercial companies to bypass the banking system. Other officials seem to see it a means of preventing a collapse in broad money of the sort that proved so catastrophic in the 1930s US Great Depression. A number of SMPC members were concerned that current official proposals to force banks to hold more capital and liquidity would perversely reduce the supplies of credit and money as bankers re-organized their balance sheets.

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