SMPC supports continuation of quantitative easing - August 2009

Bank rate should be held at 0.5%

Following its latest quarterly gathering on 21st July, the Shadow Monetary Policy Committee (SMPC) voted to leave Bank Rate at 0.5% when the Bank of England’s rate setters meet on 6th August. The unanimous SMPC vote reflected the belief that there was no immediate case for a rate increase – although one member thought that Bank Rate could be safely raised to 2% within the next six months - combined with the view that Quantitative Easing (QE) was the most effective monetary policy instrument available. Some SMPC members believed that an additional £100bn to £300bn of debt re-purchases was required once the current program had run its course. This represented a more enthusiastic view of the case for QE than the greater agnosticism revealed in the July Bank of England minutes, which were published the day after the SMPC gathering.

The SMPC poll was carried out before the UK Office for National Statistics (ONS) announced a very weak second quarter GDP figure, on 24th July. This seemed to confirm the view expressed at the SMPC gathering that the green shoots of recovery might be wilting. However, subsequent e-mail correspondence revealed that some SMPC members thought that the ONS data were too weak to be valid, possibly because of excessive price deflation. A noteworthy aspect of the 21st July meeting was the amount of time devoted to discussing the risks of sovereign default or another major collapse in the international financial sector. Some members feared that the possibility of another adverse credit-market ‘event’ this autumn should not be ruled out.