Embargoed for 00.01 hours, Tuesday 28 October 2003

The Shadow Monetary Policy Committee (SMPC), the long standing group of distinguished economists that meets quarterly at the IEA, voted to keep interest rates on hold at its October meeting. The decision was made difficult given the poor quality of the official data provided by the ONS; the weak supply side of the UK economy that is underpinned by strong borrowing; and conflicting views on the world economic outlook.

Developments in the world economy did not provide any clear signals for the UK. OECD growth looked steady but recovery in the US is still tentative, and potentially fragile given the level of US government borrowing. However, world economic growth outside the OECD is strong.

Recent revisions to UK economic statistics and changes in calculation methods had led to recorded economic growth being higher than previously thought. However, there was a lack of confidence in official economic statistics making policy decisions highly problematic. The supply side of the UK economy appears weak. Taxes are rising rapidly as is the extent of regulation. Furthermore it looks increasingly likely that despite taxes rising rapidly, government borrowing will increase. However, the SMPC did not believe that it was correct to respond to deteriorating supply conditions by loosening monetary policy particularly as both private sector borrowing and monetary growth were relatively strong. Thus, on the basis of the domestic evidence, most members of the SMPC wanted rates to remain on hold although a minority thought that an increase was warranted.

Read the full report here.