Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by six votes to three to leave Bank Rate unchanged at 0.5%, when the Bank of England’s rate setters gather on Thursday 7th October. All three SMPC members who desired an increase voted that Bank Rate should be raised to 1%. The majority on the SMPC who wished to hold Bank Rate did so for several reasons. These included: the continued de-leveraging of private-sector balance sheets; the associated slow growth of broad money and credit, and concern that fiscal tightening in the forthcoming Comprehensive Spending Review would reduce activity. There was also a worry that the international recovery was running out of steam and that this would weaken UK export demand.
A number of considerations explained why three members of the shadow committee thought that a higher Bank Rate was needed. One was that persistent stubborn inflation could lead to a loss of central-bank credibility and an upwards ‘gear shift’ in inflation expectations. Another was the disconnection between Bank Rate and commercial banks’ marginal funding costs, which meant that Bank Rate risked becoming irrelevant. There was also concern that ‘big-government’ policies had reduced aggregate supply, with the consequence that there was less spare capacity to dampen inflation than the authorities believed. Several SMPC members noted the remarkably responsible behaviour of the British workforce, who had accepted a 3.2% reduction in their real post-tax take home pay in the year to July. This seemed to be a major reason why unemployment had not risen in the way that most forecasters had expected. Finally, virtually all the SMPC members, including most of the rate hikers wanted a second round of Quantitative Easing (QE), with a further £50bn of asset purchases being the most widely recommended figure.
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 gathering will take place on Tuesday 19th October and its minutes will be published on Sunday 31st October.