The IEA’s Shadow Monetary Policy Committee (SMPC) has voted by five votes to four to leave Bank Rate unchanged at 0.5%, when the Bank of England’s rate setters gather on Thursday 9th September.
All four of the SMPC members who wanted 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 a number of reasons. These included: the slow growth of broad money and credit; the de-leveraging of private-sector balance sheets, and concern that the fiscal tightening announced in the June Budget would reduce activity once it was implemented. There was also a fear that the world recovery was running out of momentum, especially in the US where a double-dip recession seemed increasingly possible.
Several considerations explained why four members of the shadow committee thought that a higher Bank Rate was needed. One was that inflation had remained more stubborn than the Bank of England had anticipated. This cast doubt on its forecasting methods and risked inducing increased inflationary expectations. Another was that the priority the Bank appeared to be giving to Keynesian demand management conflicted with its role as the guardian of the currency. It was also felt that real gross domestic product (GDP) was a near meaningless concept now that over one half of GDP was government spending. The essential priority was to get the private sector tax base growing through supply-side friendly measures, even if this meant that total GDP was reduced by government spending cuts. However, even the advocates of an increased Bank Rate accepted that the uncertainties involved were so great that a flexible response to unfolding events was essential. Two of the rate hikers also wanted an extension of Quantitative Easing (QE) to accompany the increased Bank Rate.