Keep interest rates unchanged for the moment but increase them within the next three months was the conclusion of the iea's Shadow Monetary Policy Committee (SMPC), the long standing group of distinguished economists, at its January meeting.
The economic analysis suggested medium-term inflationary pressure in the UK that needed to be contained. The SMPC did not accept the Treasury’s view that output was below trend. It was quite clear that large amounts of government spending were not contributing to economic output. Current levels of monetary growth are consistent with higher inflation in one to two year’s time. Interest rates would need to increase to address this.
The SMPC believed that the appropriate policy response was made very much more complex by the adoption of the new inflation target (HICP). Current inflation was well below that target and risked falling below the lower limit. Nevertheless, there were clearly inflationary pressures, even if they were not being picked up by the new measure, at the current time.
The SMPC voted by a narrow margin to keep interest rates on hold. However, it decided by six votes to four that interest rates should rise within the next three months.
Read the full report here.