In its most recent poll, the Shadow Monetary Policy Committee (SMPC) voted unanimously that UK Bank Rate should be held at 1⁄2% when the official rate setters make their announcement on Thursday 12 January. The overwhelming reason most SMPC members voted, in some cases reluctantly, to hold the official interest rate in January remained their grave concern over the potential adverse effects of the Euro-zone crisis on British banks and exporters. Some ‘holds’ thought that the 4.8% consumer price inflation recorded in November was bad enough to have justified a Bank Rate increase under more normal circumstances. However, there was a widespread view on the shadow committee that the measures adopted by the Euro-zone authorities were insufficient to stabilise the situation in the Euro Area and that the UK would just have to live with that fact.
There were two further concerns shared by several SMPC members. One was that the British economy had suffered a supply-side withdrawal, so that the negative output gap relied upon to bear down on inflation was smaller than the authorities believed. The second concern was the inconsistency between the official hard-line approach to financial regulation and the need to maintain the supplies of money and credit to sustain private job-creating economic activity. Raising capital requirements now was a classic example of a perverse, business-cycle exacerbating, regulatory shock. The authorities would do better to re-instate the Special Liquidity Scheme, whose brutal and premature withdrawal has badly damaged the credit creation process.
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 5 February.