SMPC votes to raise Bank Rate - June 2011

SMPC votes 6/3 to raise rate to 1%

Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by six votes to three that Bank Rate should be raised in June. Five of the rate hawks wanted to raise Bank Rate by ½% to 1%, while one member (who had previously worked as a central banker in Hungary) wanted an increase of 1% to give a Bank Rate of 1½%. The other three members of the shadow committee voted to hold Bank Rate at the ½% originally set in March 2009. There were several reasons why a majority of SMPC members wanted to see a rate hike in June. One was concern that the persistent overshooting of the inflation target – and the Bank of England’s less than convincing response – was undermining the credibility of the monetary framework. Another was the worry that the increasingly negative real interest rate paid on UK money holdings would induce further downward pressure on sterling, and that this would be fully reflected in domestic prices in the long run. A third reason for a rate increase was the belief that the monetary authorities would have more flexibility in both directions if Bank Rate was raised to 1% or 1½% in June and, perhaps, 2% to 2½% in the longer term. This would allow the use of rate cuts as a stimulus in the future, if the economy turned out to be weaker than anticipated.

The main reason that three SMPC members wanted to hold Bank Rate at ½% was the concern that the UK recovery was not firmly established. There was also a belief that the banking system remained so weak that there would be a long period of sluggish money and credit growth ahead and that this wo