Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by six votes to three to raise Bank Rate to 1% when the official rate setters next meet on 10th March. All three dissenting SMPC members wanted to hold Bank Rate at its present ½%. The SMPC members advocating a ½% increase in Bank Rate did so for three main reasons. A repeatedly mentioned one was the threat to the credibility of the UK’s counter-inflation framework if the Bank went on ignoring persistent overshoots of the inflation target. The concern was that it would eventually require a more aggressive and disruptive monetary tightening if credibility was lost than if Bank Rate went up immediately. Three SMPC members also questioned the Bank’s reliance on a closed economy ‘output-gap’ model of inflation rather than an open-economy model in which sterling had a major role to play in determining the price level and was a crucial transmission mechanism through which monetary policy affected the economy. The third concern amongst the SMPC hawks was that accelerating inflation was covertly and inappropriately reducing the real rate of interest, and that this could itself lead to a self-feeding upwards spiral in the rate of price increase.
One explanation of why other SMPC members thought that it was better to hold Bank Rate was the apparent weakness of UK activity in late 2010. Nobody doubted that the negative fourth-quarter growth figure was distorted by December’s severe winter weather. However, the doves believed that there had been either a ‘growth pause’ or a small fall once the weather distortion was removed. The counter view was that reduced oil production, a worsening in the trade deficit on real non-oil exports, and a growth in the negative national accounts discrepancy had also distorted the figures and that real private-sector home demand was still recovering at a satisfactory pace. Other reasons for wanting to hold rates were the slow growth of broad money and concern about the possible consequences of the government’s fiscal retrenchment.
The SMPC 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 group in Britain and meets regularly to debate the deeper intellectual issues involved distinguishes the SMPC from the similar exercises carried out by a number of publications.