Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by seven votes to two that Bank Rate should be held at its existing ½% when the official rate setters make their next announcement on Thursday 6th October. The two dissenting SMPC members wanted to raise Bank Rate by ½% to 1%. The main reason why most SMPC members wished to hold Bank Rate in October was concern over the potential adverse consequences of the turmoil in the Euro-zone for Britain’s exports together with the potential risks to UK banks if their Continental counterparties were destabilised by a sovereign debt default. Two of the holds regretted that Bank Rate had not been raised around the middle of last year, when there was the opportunity to do so. This would have allowed the Bank of England to achieve a greater psychological impact now with an overt rate cut, than is achievable with another hold. A rate hike last year would have also strengthened sterling and meant that inflation would have been less of a concern than it has now become.
The main reasons that two SMPC members wanted to raise Bank Rate was a belief that the UK economy was weak for predominantly supply-side reasons – a number of the ‘holds’ shared this view to a greater or lesser extent – and that the sustained period of high and accelerating inflation had already destroyed so much of the Bank’s credibility that it risked the development of a wage-price spiral. There was a consensus that further Quantitative Easing (QE) should be on standby in case the situation in the Euro-zone worsened, but no great enthusiasm for implementing it immediately.
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 6th November.