At its latest meeting, the IEA’s Shadow Monetary Policy Committee (SMPC) voted by six votes to three to keep UK Bank Rate at 5% on 7th August. All the members of the SMPC were concerned about the current UK economic situation. Rising inflation and collapsing indicators of real activity presented the MPC with a difficult dilemma – though most members regarded this as a dilemma largely of the MPC’s own making. The grim prospects for future inflation led most members to want to hold interest rates. However, there was a significant minority who wanted to cut rates now as a result of the worsening situation. One of the “cutters”, Patrick Minford described the Bank of England as showing a “total lack of leadership”.

The majority who wanted rates to be held were concerned at the signals a cut in interest rates would send to the markets when the inflation outlook was worsening. A cut in interest rates now, it was argued, would lead to inflationary expectations rising and, if this in turn led to a rise in wages, any recession would be made worse. Trevor Williams, Chief Economist, Lloyds TSB Corporate Markets, argued strongly that the Bank needed to restore credibility and keep rates at their current levels.

Most of those who wanted to hold interest rates now wished to cut Bank Rate in the near future – some of them aggressively. Collapsing monetary aggregates, after making appropriate adjustments for problems in the inter-bank market, were viewed with great concern by several members of the committee. This view was summed up by John Greenwood, Chief Economist at Invesco, who commented, “The money numbers are starting to fall. Bank Rate should remain unchanged in August but with a bias to cut aggressively further out.”

Read the report here.