Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by eight votes to one that Bank Rate should be held at 1⁄2% when the official rate setters make their announcement on Thursday 10 November. The dissenting SMPC member wanted to raise Bank Rate to 1% with immediate effect. The main reason most SMPC members voted to hold in November was concern over the potential adverse consequences of the turmoil in the Euro-zone for Britain’s exports and UK banks. Several of the holds thought that the UK inflation situation was bad enough to have justified a credibility-preserving rate hike in the absence of the uncertainties on the Continent. There was also a near universal concern on the shadow committee that the supply side of the British economy was so arthritic that any monetary stimulus would be largely dissipated in higher inflation.
The other major worry was that heavy handed financial regulation and additional capital requirements, at a time when banks could not raise capital in the equity markets, could lead to a retrenchment in UK bank credit and broad money. From this perspective, the additional £75bn Quantitative Easing (QE) announced in October was trying to offset the perversely negative effects of a pro-cyclical regulatory stance with a direct cash injection into the economy. The same analysis implies that the extra capital requirement imposed on the Continent’s banks by the 26th October Euro-zone Summit would also act as an adverse regulatory shock to the supplies of money and credit. This had the potential to seriously reduce activity in the zone as a whole.
The SMPC itself is a group of economists who have gathered quarterly at the Institute of Economic Affairs (IEA) since July 1997. That it was the first such group in Britain, and that it gathers regularly to debate the issues involved, distinguishes the SMPC from the similar exercises carried out by a number of publications. Because the committee casts exactly nine votes each month, it carries a pool of ‘spare’ members since it is impractical for every member to vote every time. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. As a consequence, the nine independent SMPC analyses should be regarded as being more significant than the precise vote. The latter is not intended as a forecast of what the Bank of England will do but a declaration of what it should do. The next SMPC minutes will be published on Sunday 4 December.