Wait and see' argue SMPC majority - October 2009

SMPC majority argue for continued low interest and for QE to continue

The Shadow Monetary Policy Committee (SMPC) has voted unanimously to leave Bank Rate at 0.5% when the Bank of England’s rate setters meet on 8th October. There was a widespread view that the present schedule of quantitative easing needed to be persisted with and extended beyond November, when new Inflation Report forecasts will be available. Looking further ahead, most members of the committee had a neutral bias. However, one thought that Bank Rate needed to be raised to 2% before the end of 2009. Two further SMPC members suspected that monetary policy would need to be tightened before too long: for the first time in recent months, a significant minority is looking to the time when policy will have to be tightened. There was a strong undertone of ‘wait and see’ in the recommendations of all the members.

Most members of the shadow committee believed that the downwards momentum in the UK economy was ameliorating and that positive growth would be resumed in the third quarter and fourth quarters of this year. However, there were also fears that there might be a relapse in the first half of 2010, because of the tax increases that have been announced but not yet implemented. There was further concern about the implications of the adverse fiscal background for monetary policy. Some SMPC members thought that the urgently needed fiscal retrenchment would create a ‘hole in demand’ that would have to be offset by an expansionary monetary stance. However, there was a contrary view that the fiscal stabilisation literature suggested that a reduction in the budget deficit brought about by reduced government consumption would be expansionary where output was concerned.

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