SMPC split on both QE and interest rates - March 2010

SMPC votes six to three against an increase in interest rates against grim fiscal background

In its latest e-mail poll, the Shadow Monetary Policy Committee (SMPC) voted by six votes to three to leave Bank Rate unchanged at its present 0.5% on Thursday 4th March. The three dissenters, in contrast, all voted to raise Bank Rate to 1%. This reflected their concern that the adverse fiscal background had damaged the economy’s supply side so extensively that it left the monetary authority facing a helplessly malign output/inflation trade off. Both SMPC hawks and doves agreed that the recent UK output data had been disappointingly weak and that there was a serious risk of a renewed downturn in activity. The disagreement was whether this was primarily a demand-side problem, perhaps associated with the slow growth of M4X broad money, or a supply-side malaise caused by the 16.8 percentage point rise in the government spending ratio since 2000 and the mass of new regulations that has been introduced.

There was also debate among the shadow committee as to whether Quantitative Easing (QE) should be resumed, now that the initially intended £200bn schedule had been completed in February. Here, views were mixed. Some ‘holds’ were happy to maintain the QE pause for the foreseeable future, while others thought that the authorities should be prepared to re-introduce QE at any moment, particularly if the growth of M4X remained sluggish. One advocate of a 1% Bank Rate also wanted to re-instate QE of £25bn per quarter, while another hawk was prepared to wait and see, and a third wanted some rolling back of the £200bn already committed. There was a general agreement that the uncertainties about the future course of the economy were such that strongly entrenched views were inappropriate. The fact that this was a pre-election period also rendered fiscal and monetary policy making problematic. This was because the time horizon of senior politicians was now less than the lag between cause and effect when policy settings were altered.

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