SMPC split on continuation of QE - Februrary 2010

SMPC divided on QE but united in serious concerns about government fiscal policy.

Following its latest vote, the IEA’s Shadow Monetary Policy Committee (SMPC) voted by seven votes to two to leave Bank Rate unchanged at 0.5% on Thursday 4th February. The two dissenters, in contrast, both voted to raise Bank Rate to 1%. This reflected their concern that inflationary pressures were building and that a reduction in the real rate of interest was not appropriate given the irresponsible fiscal background. A specific concern was that the credibility of the monetary authority might become tainted by association because of the persistent failure of the fiscal authority to achieve its borrowing forecasts. A majority of the shadow committee felt that an explicit and detailed fiscal consolidation plan needed to be put in place immediately electoral considerations allowed. Two members advocated a revived Medium-Term Financial Strategy, similar to that of the early 1980s.

There was debate among the shadow committee membership as to whether Quantitative Easing (QE) should be allowed to expire after the current schedule ran out this month. Four members wanted to extend the QE programme, with three specifically asking for an additional £50bn; while three SMPC members believed that there should be a pause. One reason for pausing was to demonstrate that the Bank of England was not under-writing a pre-election giveaway. QE could be revived after the election but a lost reputation for virtue would take longer to restore. The final view, which overlapped with the others to some extent, was that QE should be altered to deliver an appropriate path for the M4X broad money supply. Some SMPC members were concerned that official proposals to force banks to hold more capital and liquidity would reduce the supplies of money and credit and undo the benefits of QE.

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