Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by five votes to four to hold Bank Rate at its present ½% when the official rate setters meet on 7th April. All four dissenting SMPC members wanted to raise Bank Rate to 1%. There were several reasons why the majority of SMPC members wanted to leave Bank Rate unaltered. One was concern that the UK economy would struggle this year as increased taxes and high energy costs damaged household budgets. A second justification for a rate hold was the continued weakness of the banking sector. This meant that there was little elasticity in the supplies of money and credit. A third reason was the potentially malign effects of government spending cuts and increased National Insurance Contributions on employment. Finally, there was concern that the political turmoil in the Middle East and the tragic events in Japan would adversely affect the global economic environment.
The main reason that four SMPC members wanted to raise Bank Rate to 1% was the persistent overshooting of the inflation target and the fear that this risked undermining the credibility of the entire monetary framework. Another issue was that accelerating inflation meant that real interest rates were negative and falling. This was unfair to savers but also inappropriate now that the worst phase of the financial crisis was over. As far as the 23rd March Budget was concerned, there were few strong views expressed by the SMPC membership. This was mainly because it was felt that the important fiscal initiatives had already been taken in 2010. However, one member feared that the upwards-revised official borrowing projections were still over-optimistic and that there could be financial-market difficulties once this became apparent.
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 Sunday 1st May.