Following its most recent gathering, the Shadow Monetary Policy Committee (SMPC) voted unanimously that UK Bank Rate should be held at 1⁄2% on Thursday 9th February. The main reason why SMPC members again voted without any dissension to hold the official interest rate in February was their concern about the potential adverse consequences of the crisis in the eurozone for UK banks and exporters. Indeed, more time was devoted to a discussion of the situation in the eurozone at the SMPC meeting than it was to British policy issues. The general view was that the UK monetary authorities were in the position of doctors attempting to treat a patient with a life threatening medical condition that was incapable of diagnosis. Any aggressive treatment was more likely to prove fatal than to provide a cure. However, relying on a spontaneous recovery did not necessarily provide much hope either.
Two things that the SMPC generally agreed on were that a Greek default was unlikely to be averted and that there was a serious inconsistency in British monetary policy between the official hard-line approach to financial regulation and the need to maintain the supplies of money and credit to the private sector in order to sustain job-creating activity and the tax base. The official intention to raise bank capital and liquidity requirements represented a perverse, business-cycle exacerbating, regulatory shock. The UK monetary authorities would be better advised to re-instate the Special Liquidity Scheme, whose premature withdrawal had badly damaged the credit creation process, if they wanted to succour Britain’s economic recovery.
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 March.