Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by five votes to four that Bank Rate should be raised when the Bank of England’s rate setters next meet on 4th August. All five SMPC members who voted for an increase wanted to raise Bank Rate by ½% to 1%. The main reason why a narrow majority of the shadow committee wished to see Bank Rate increased in August was concern that the UK monetary framework risked losing credibility if the Bank ignored the persistent overshoots of the inflation target. There was also a view that the current Bank Rate was appropriate when the global financial crisis was at its worst. However, things had now settled sufficiently to justify some element of interest-rate ‘normalisation’. Another factor influencing the hawks was the belief that there had been a serious loss of aggregate supply stemming from the tax-and-spend policies of the post 2000 period, as well as the 2008 global financial crash.
The two main reasons that four SMPC members wanted to hold Bank Rate were their beliefs that: 1) the UK economy was weak for demand-side reasons, and 2) continued de-leveraging meant that present money and credit growth were inadequate to support real activity. Two issues on which most people agreed were: first, that excessively heavy-handed financial regulation was in danger of causing a contraction in banks’ balance sheets and a renewed fall in economic activity, and, second, that the Euro-zone crisis posed a serious risk to Britain. There was a consensus that Quantitative Easing (QE) might need to be revived if the Euro-zone’s problems got out of hand.
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 4th September.