Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by a narrow margin of five votes to four that Bank Rate should be held at its current ½% in July. All four SMPC hawks wanted to raise Bank Rate by ½% to 1%. The lack of a ‘plus ¼%’ middle ground between the holds and the advocates of a ½% increase reflected divergent views on a number of issues. One division concerned whether the sluggish growth of national output was a pure ‘demand-side’ phenomenon or whether it reflected a withdrawal of aggregate supply caused by the unprecedented peacetime increases in the burdens of UK government spending, borrowing and taxation during the 21st Century. Another divide concerned how far Britain should be regarded as a small, open economy – in which case downward movements in the exchange rate should eventually become fully reflected in domestic prices – and how far it should be regarded as a large metropolitan economy, where the output gap could be regarded as the main influence on inflation.
Other important issues on which views differed included how much reliance could be placed on the official statistics and whether the sluggishness of broad money and credit meant that there was no long-term inflation risk. Some SMPC members worried about the threat to the Bank of England’s credibility caused by its non-reaction to overshoots of the inflation target. There was also concern that the British fiscal approach could lose market credibility, if public borrowing did not fall in line with the official forecasts. However, even the SMPC hawks accepted that additional quantitative easing might be needed if the Euro-zone crisis threatened UK banks.
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 31st July.