Monetary Policy

SMPC votes narrowly to hold interest rates 5th February 2007


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The IEA's Shadow Monetary Policy Committee has voted by five votes to four to hold interest rates
Shadow Monetary Policy Committee says: “hold interest rates for now” in knife-edge vote

At its latest meeting, the IEA’s Shadow Monetary Policy Committee (SMPC), a group of leading monetary economists that monitors developments in UK monetary policy, voted to hold interest rates by five votes to four. Three members wanted to raise rates by 0.25% and one member wanted to raise rates by 0.5%.

A number of SMPC members were concerned about the recent rise in CPI inflation to 3%, expressing the view that the Bank of England had risked its credibility by allowing inflation to rise so rapidly and by not being sufficiently active, at an early enough stage. There was therefore a general welcome for the recent rise in interest rates as it was essential that markets continued to believe that the Bank of England would hit the inflation target. If it did not then wage settlements would begin to rise.

Those members who wished to raise rates were concerned by signals from monetary data and asset prices that suggested inflation might rise further in the future. The five members who wished to hold rates believed it was desirable to wait see the effects of the rises in interest rates in recent months because it is known there are long and variable lags between a tightening of monetary policy and a reduction in inflation. However, three of the five members who voted in favour of holding rates had a bias in favour of raising rates later in the year. There was also a feeling amongst those who wished to raise rates that there may be a need for monetary policy to tighten even further in the near future. Andrew Lilico of Europe Economics summarised that view saying: “there is a reasonable probability that inflation has peaked but if it goes any higher then there would be a serious breach of credibility.” He continued: “Rates should rise by ?% now but rates should rise further if there is another rise in inflation.”

Read the full report here.