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In its latest monthly deliberations the IEA Shadow Monetary Policy Committee (SMPC) voted by seven votes to two to reduce UK Bank Rate on Thursday 9th October. Indeed, four members of the shadow committee were in favour of cutting Bank Rate by as much as 0.5% in October and most had a bias to ease further in subsequent months. Has the SMPC turned dovish?

On the contrary, the SMPC has been perfectly consistent. Most of its members expressed strong public concern three years ago when money growth was getting out of control. They saw that as leading to asset price and general inflation. Indeed, arguably, this was one of the causes of the banking crisis. The Bank of England’s MPC had different theories of inflation, though, and they reacted slowly.

At the current time, money supply growth is collapsing. One of the causes of the Great Depression was that the Fed reacted incompetently to an astonishing collapse in the money supply after 1929. The price level fell and the Great Depression followed. The Bank of England’s MPC must not make that mistake. It missed the monetary signals of inflation – will it miss the monetary signals of deflation?

The SMPC was also concerned that the traditional instruments of monetary policy were less effective in current circumstances. One member suggested that changes in the official discount rate were now of as much use as a peashooter in a major tank battle. Perhaps the Bank of England will have to use instruments other than the Bank base rate to loosen monetary policy – though it is already doing that to an extent.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

2 thoughts on “Time for a change of direction in monetary policy”

  1. Posted 08/10/2008 at 11:27 | Permalink

    comment from PB: in case you are wondering, this was written 5 minutes before the Bank of England made its decision for an emergency rate cut!

  2. Posted 08/10/2008 at 11:27 | Permalink

    comment from PB: in case you are wondering, this was written 5 minutes before the Bank of England made its decision for an emergency rate cut!

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