Following its latest quarterly gathering on 13th April, the Shadow Monetary Policy Committee (SMPC) voted by five votes to four to raise Bank Rate to 1% in May. All four dissenting members voted to hold the official interest rate at its present ½%. There were various reasons why a majority of SMPC members wanted to raise Bank Rate. One was concern that the overshooting of the inflation target – when combined with the fact that the annual increase in the target consumer price index (CPI) was running 1.4 percentage points below the previous RPIX target measure rather than the 0.5 percentage points gap claimed at the time of the official changeover – was undermining the credibility of the monetary framework. There was also concern that the present negative real interest rate was leading to a serious misallocation of capital, as well as doing injustice to savers. A third reason for wanting a rate hike was the belief that the monetary authorities would have more flexibility in both directions if Bank Rate was raised to 1% immediately and perhaps 2% to 2½% in the longer term. There was also concern that high levels of public borrowing would prove more intractable than was predicted in the Budget, and that this could test the patience of the global bond markets at a time when sovereign risk concerns were escalating.
The main reasons that four SMPC members wanted to hold Bank Rate at ½% was the fear that the UK economic recovery was not yet firmly established together with the 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 would seriously limit the scope for recovery. This meant that low interest rates currently existed alongside abnormally tight money and credit conditions, not just in Britain but in many other developed economies as well.
The SMPC itself is a group of independent economists who have gathered quarterly at the Institute of Economic Affairs (IEA) since July 1997. The facts that it is the longest established such group in Britain and that it meets regularly to debate the deeper intellectual issues involved distinguish the SMPC from the similar exercises carried out by a number of publications. Because the SMPC casts exactly nine votes each month, it carries a pool of ‘spare’ members since it is not practical for every single member to vote every month. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. The next SMPC minutes will be published on Sunday 5th June.