SMPC supports quantitative easing but sends warning to the Bank of England - May 2009

SMPC members call upon Bank of England to explain its exit strategy

Following its latest quarterly meeting the IEA Shadow Monetary Policy Committee (SMPC) unanimously voted to leave Britain’s Bank Rate at 0.5% when the Bank of England’s rate setters meet on 7th May. The unanimous SMPC vote reflected the belief that there was little immediate case for a rate increase - while activity was so weak - combined with the view that 0.5% was the practical lower limit where the money markets were concerned. One member believed that it was technically possible to lower Bank Rate further, using a US-style approach, but accepted that this would not make a noticeable difference to the wider economy.

The SMPC had been one of the earliest advocates of quantitative easing (QE) and expressed a strong preference for its continuation as the main monetary tool. However, the shadow committee was agreed that more specific plans for the implementation and withdrawal of QE were needed. On the implementation side, several members said that the current £150bn QE target needed to be increased. On the issue of withdrawal, the SMPC was unanimous in believing that the UK monetary authorities needed to publish an explicit exit strategy well before QE had to be put into reverse. The SMPC was disappointed that the Bank of England had ceased publication of the statistics needed to monitor QE and that it was not publishing regular monthly figures for the ‘core’ broad money definition that it appeared to be targeting. The SMPC gathered on the eve of the 2009 UK Budget and three days before the publication of the weak first-quarter GDP figures on 24th April. Both developments were consistent with the profound concern expressed in the SMPC minutes about the adverse fiscal backdrop and the likelihood of a fiscally-induced collapse in aggregate supply.

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