SMPC split on next move for interest rates - May 2010

SMPC also worried about fiscal crisis - members call for a new Medium Term Financial Strategy

Following its latest meeting, the IEA Shadow Monetary Policy Committee (SMPC) voted by six votes to three to leave Bank Rate unchanged at its present 0.5% when the Bank of England’s MPC announce their next rate decision on Monday 10th May. (Editorial note: the Bank of England’s rate setting meeting has been postponed to Friday 7th May, and the rate announcement to the following Monday, to avoid the 6th May election date.) Two of the shadow committee’s dissenters voted that Bank Rate should be raised by 0.5% to 1% on Monday 10th May, while one preferred a 0.25% increase. The three SMPC hawks recognised that a rate change was unlikely straight after an election, particularly as a new government might not have been formed in the event of a hung Parliament. However, the purpose of the SMPC is to advocate what should happen, not to predict what will happen.

There was widespread concern among the members of the shadow committee that the current fiscal situation was not sustainable. Several members believed that a more aggressive fiscal consolidation should be put in place than the basically similar proposals of the major political parties. Some surprise was expressed that more attention had not been paid to generational accounting considerations in the political debate. These revealed that the UK was committed to more off-balance sheet spending obligations than any other leading economy, with the US in the second worst position. The implication was that Britain faced a uniquely bad long-term fiscal crisis, which would affect all future generations, as well as the immediate problems arising from the large Budget deficit. Some SMPC members believed that the next Chancellor should announce a revived Medium Term Financial Strategy, incorporating both a declining fiscal deficit to GDP ratio, and a commitment to keeping annual M4X broad money growth in a 5% to 8% range using funding policy as a tool.

The SMPC itself is a group of independent economists who have met quarterly at the Institute of Economic Affairs (IEA) since July 1997. That it is the longest established such body in Britain and meets physically to discuss the issues involved distinguishes the SMPC from the similar exercises carried out by several publications. The next two SMPC e-mail polls will appear on the Sundays of 6th June and 4th July.

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