Following its latest gathering, the Shadow Monetary Policy Committee (SMPC) voted by a knife- edged five votes to four that Bank Rate should be raised when the official rate setters meet on 8th September. All five members who voted for an increase wanted to raise Bank Rate by 1⁄2% to 1%. There were two main reasons why a narrow majority of the SMPC wished to see a Bank Rate in- crease in September. The first was the suspicion that Britain’s weak growth and limited job creation were predominantly supply-side problems caused by excessive government spending, populist po- litical interventions and perverse regulatory shocks, which could not be alleviated by a lax monetary policy. There was also concern that the UK monetary framework risked losing popular credibility if the persistent overshoots of the inflation target continued to be ignored. One risk associated with the current policy mix, in the view of the SMPC hawks, was that it could embed a ‘stagflationary’ bias into the UK economy, which could only be countered by painful measures in the longer run.
The reason that four SMPC members wanted to hold Bank Rate was a belief that the UK economy was weak for predominantly demand-side reasons, and that the recent data suggested that activ- ity was palpably faltering. Both hawks and doves agreed, however, that the present crisis in the Euro-zone posed a serious risk to Britain because of the damage it might do to our export markets and to UK banks’ capital and reserves if there was a chain of defaults. There was a consensus that Quantitative Easing (QE) might need to be revived if the situation in the Euro-zone 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 2nd October.