Monetary Policy

SMPC votes to continue with quantitative easing but calls for explicit exit strategy


Monetary Policy

Brown's regulatory reforms contributed to the financial crisis

Rates should be held at 0.5%
Shadow Monetary Policy Committee votes to continue with quantitative easing but calls for publication of an explicit exit strategy as soon as possible.

The SMPC vote…

At its latest meeting, held at the Institute of Economic Affairs (IEA) on Tuesday 21st April the IEA’s Shadow Monetary Policy Committee (SMPC), a group of leading monetary economists that monitors developments in UK monetary policy, unanimously voted to hold Britain’s Bank Rate at its current level of 0.5%.

…and biases
In addition to wanting to hold in May, seven out of nine members also had no immediate bias to change Bank Rate in the immediate future. This was partly because there seemed to be little case for an imminent increase – as long as international and domestic economic activity were as weak as they were – but also because most members thought that 0.5% was the practical floor for Bank Rate where the money markets were concerned. However, one member, Trevor Williams believed that it was technically possible to lower Bank Rate further, by adopting the US approach, and so had a bias to ease without a strong view that it should be done. In contrast, Peter Warburton wanted to raise the official REPO rate before the year end.

Concerns about quantitative easing

The SMPC had been early advocates of the policy of quantitative easing now adopted by the Bank of England and expressed a strong preference for the continuation of direct monetary control as the main monetary tool, given that changes in Bank Rate would have little effect, at their 21st April meeting.

However, there was also agreement that this was a potentially dangerous policy and that there needed to be an explicit exit strategy available in the public domain before the policy had to be put into reverse. Otherwise, economic agents could fear that QE was simply a cloak to mask the government’s resort to crude inflationary finance in an attempt to buy votes ahead of a 2010 general election. There was widespread support for the view, advanced by Roger Bootle and Philip Booth at the 21st April gathering, that the authorities should publish an explicit exit strategy, akin to the early 1980s Medium Term Financial Strategy.

Click here to download the minutes of the meeting.