At its meeting of Tuesday 15th April, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) recommended by five votes to four that Bank Rate should be raised 1⁄4% on Thursday 8th May, including four votes for a rise of 1⁄2%.
Those urging a rate increase offered a variety of rationales. Some expressed the view that it would be better to start rate rises when the economy is going well and raising rates can be seen by consumers and investors as a sign of economic improvement than to wait until inflation or other problems force a rate rise which would then be regarded negatively. Others said that low rates are encouraging a misallocation of capital between firms and encouraging policymakers to use additional regulation to discipline economic behaviours that would be better disciplined by the price mechanism and market forces if interest rates were a little higher. Others suggested that rapid rises in house prices indicated that sentiment is in danger of becoming carried away and a “shot across the bows” is needed.
Some of those urging rates remain unchanged noted that inflation is low, output remains depressed below peak, and that we are still early in recovery. Factors such as rapid house price rises should be seen at this stage as corrections to past falls rather than as signs of excess. Credit growth remains lower and the banking sector remains fragile. One of those voting for a hold, however, expressed the concern that large UK asset price movements might reflect higher monetary growth in emerging markets than is yet visible in the data, and said that if rapid house price rises in the UK continue he might be inclined to recommend a rate rise within the next few months.
The SMPC is a group of economists who have gathered quarterly at the IEA since July 1997. That it was the first such group in Britain, and that it gathers regularly to debate the issues involved, distinguishes the SMPC from the similar exercises carried out elsewhere. To ensure that nine votes are cast each month, it carries a pool of ‘spare’ members. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. As a result, the nine independent and named analyses should be regarded as more significant than the exact overall vote. The next two SMPC polls will be released on the Sundays of 1st June and 6th July, respectively.