SMPC rejects rise in interest rates by narrow majority - June 2010

SMPC votes five to four to leave interest rates unchanged

In its latest poll, the IEA Shadow Monetary Policy Committee (SMPC) voted by five votes to four to leave Bank Rate unchanged at 0.5% when the Bank of England’s rate setters announce their decision on Thursday 10th June. This narrow margin is the closest that the SMPC has come to advocating a rate rise for a long time. All four of the dissenters voted that Bank Rate should be raised by 0.5% to 1%. There was no strong bias as to where rates should go in subsequent months, or whether Quantitative Easing (QE) needed to be re-activated. Some rate hawks believed that further rises beyond 1% would be necessary, although no-one was advocating a rapid return to the so called ‘neutral’ rate of 4.5% to 5%. It was also believed that the authorities should be on standby to re-activate QE if the economy proved unexpectedly soggy.

There was widespread agreement among the members of the shadow committee that the fiscal situation inherited by the Conservative-Liberal coalition could not be sustained and risked placing unsupportable obligations on future generations – unless they chose to default at some stage.

The 22nd June Budget and the autumn Comprehensive Spending Review would be crucial in setting out the fiscal parameters for the next half decade. Some members expressed concern that the UK was the wrong side of the Laffer curve, now that government spending was around 54% of the factor-cost measure of national output.

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