Following its latest quarterly gathering, the Shadow Monetary Policy Committee (SMPC) voted by a knife-edged margin of five votes to four to leave Bank Rate unchanged when the Bank of England’s rate setters assemble on Thursday 9th December. All four dissenting SMPC members believed that Bank Rate should be raised by 50 basis points to 1%. This recommendation is consistent with the old adage that borrowing costs came down in quarters but went up in halves. The SMPC majority who wished to hold Bank Rate in December recognised that the third-quarter data for the British economy had been reasonably encouraging. However, the five SMPC members concerned still regarded a rate hike in December as inappropriate. The reasons included: the continued de-leveraging of the banking system; the consequent slow growth of broad money and credit, and concern that the government’s fiscal tightening would reduce activity as it came into effect. The uncertain outlook for some other industrial economies was another reason why the majority of the SMPC favoured a rate hold.
A variety of considerations explained why four members of the shadow committee thought that a higher Bank Rate was needed. One was the disconnection between Bank Rate and commercial banks’ marginal funding costs, which meant that the official rate risked becoming irrelevant. Another concern was the indication of a modest build up of inflationary pressure in the private sector, especially that part exposed to international trade. A third worry was that the Bank of England risked losing credibility if it did not react to sustained above-target increases in the consumer price index and ignored the extent to which the inflation rate measured by the more popular retail price index was running above its consumer-price index equivalent.
The SMPC itself is a group of independent economists who have gathered 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 SMPC minutes will be published on Sunday 9th January.