SMPC supports Bank policy but members express concern about long run - June 2009

QE welcomed, but not without reservation

In its latest poll, the Shadow Monetary Policy Committee (SMPC) unanimously voted to leave UK Bank Rate at 0.5% when the Bank of England’s rate setters meet on 4th June. The unanimous SMPC vote reflected the belief that there was little case for a rate increase in the near future – despite signs that the lower turning point of the international and domestic business cycles may not be too far off - combined with the view that 0.5% was close to the effective lower limit where Bank Rate was concerned. The SMPC had been an early advocate of quantitative easing (QE) and there was a general belief among its members that QE was the ‘least-bad’ option available under current circumstances. Some members of the IEA’s shadow committee thought that the scale of QE would need to be stepped up. Others thought that the current thrust of monetary policy was about right for the time being.

The SMPC also welcomed the Bank of England’s belated publication of a back run of quarterly statistics for ‘core’ M4 broad money, excluding the deposits of other financial corporations, and the Bank’s accompanying announcement that it would resume publication of the table showing the links between public borrowing, funding policy, bank credit and broad money in early June, having previously suspended publication last autumn. This information was vitally important, given that QE was essentially an attempt to boost ‘core’ M4 using open market operations in the hope that the links between money and activity would then prove tight enough for this to stimulate demand.

There was concern about the longer-term consequences of present policies. A particular worry was whether it was possible to make a smooth re-entry from QE without provoking either a renewed downturn or losing control of inflation.

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