SMPC votes for interest rates to remain unchanged - April 2009

Quantitative easing should be pursued for now but should be rapidly unwound when necessary

In its latest poll the Shadow Monetary Policy Committee (SMPC) voted to leave Britain’s Bank Rate unaltered at 0.5% on Thursday 9th April. All nine members of the shadow committee, which is run in association with the Institute of Economic Affairs (IEA), thought that UK Bank Rate was now at its effective lower limit. However, there was no immediate case for a rate increase in the SMPC’s view, as long as the international and domestic economies were as weak as they were at present. The SMPC believed that the quantitative easing measures announced in the 18th March Monetary Policy Committee (MPC) Minutes were now the important monetary initiative.

The IEA’s shadow committee had advocated quantitative easing for several months before the UK authorities adopted this approach. However, the SMPC has consistently argued that the adoption of quantitative easing is a major decision that could engender serious collateral damage in the wrong circumstances. One member even suggested that quantitative easing was the monetary-policy equivalent of deciding to employ a tactical nuclear weapon, in its scope for unintended adverse consequences. There was unanimity that the unconventional measures taken to increase monetary growth needed to be rapidly unwound, once they had done their work, to avoid a longer-term inflation problem. The SMPC also expressed concern, ahead of the 22nd April Budget, that Britain was facing the worst run of fiscal deficits in its peacetime history. These would probably crowd out private activity in the short term and risked being monetised, in the longer run, leading to accelerating inflation.

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