Following its latest quarterly gathering on 19th October, the Shadow Monetary Policy Committee (SMPC) voted by five votes to four to leave Bank Rate unchanged at 0.5% when the Bank of England’s rate setters assemble on Thursday 4th November. Three of the dissenting SMPC members voted that Bank Rate should be raised to 1%, while one voted for a 100 basis points increase to 1.5%. The majority on the SMPC who wished to hold Bank Rate did so for a variety of reasons. These included the slow growth of broad money and credit and concern that the fiscal tightening in the Comprehensive Spending Review would reduce activity. There was also a worry that the international recovery was running out of steam in the mature industrial economies.
A number 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 Bank Rate risked becoming irrelevant. Another was the continued signs of inflationary pressure in the sectors of the economy exposed to international trade. There was also concern that the sharp rise in government spending over the past decade in the US, as well as in Britain, had reduced aggregate supply and that there was less spare capacity than the monetary authorities believed. Some SMPC members also suggested that the problems confronting the mature economies looked more like a re-distribution of economic power from the tax-and-spend European and US economies to less sclerotic emerging market economies than a demand-deficient Keynesian recession. Finally, three members of the shadow committee wanted a second round of Quantitative Easing (QE) to be implemented over the next quarter, five wanted to hold QE in reserve, and one thought that its task was now completed.
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 5th December 2010.