Monetary Policy

SMPC Votes to Hold Interest Rates


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At its April meeting, the IEA's Shadow Monetary Policy Committee voted to hold interest rates for the timebeing
Shadow Monetary Policy Committee Votes Against Rate Rise

At its April meeting, the Shadow Monetary Policy Committee voted against increasing interest rates.

Many of these leading economists were concerned about the long-term prospects for inflation. However, they accepted that economic activity was slowing down and that it was appropriate to ‘wait and see’ before interest rates were increased again. The slowdown may be partly attributable to past increases in interest rates, although government fiscal policy and other government policies undermining the private sector may also be to blame.

The UK economy is providing policymakers with mixed signals. Retail sales have slowed down and employment is no longer growing. Underlying GDP growth may be lower than is commonly presumed, as nearly one third of the published growth rate can be attributed to questionable productivity improvements in the public sector. Roger Bootle, Economic Adviser to Deloitte, summed this view up: “The economy is likely to be softer than most people expect. The Euro-zone remains very weak and the recent retreat in the stock market indicates a much weaker world economy.”

Members did express concern that the way in which fiscal policy was being conducted would lead to lower future growth. SMPC Chairman, David B. Smith, commented: “The main problem is, how should a responsible monetary authority behave when faced with a government that is spending so irresponsibly? Increased spending and regulation will lead to slower growth, but this could happen at the same time as inflation is increasing. We could have a mild dose of ‘stagflation’.”

Despite the low level of underlying growth and retail sales, inflation had picked up and monetary growth was running at worrying levels – implying concern about inflation in the medium term. Tim Congdon, Chief Economist at Lombard Street Research, commented: “Monetary growth will not fall back without a rise in interest rates. With output above trend and broad money growing at about 10%, inflation will rise above target. If broad money continues to grow at current rates, inflation will eventually rise to 5% unless action is taken.” Many on the SMPC shared these long-term concerns, but believed that further evidence regarding the response to earlier changes was needed before interest rates were raised again.

A motion to hold interest rates was carried by five votes. Three SMPC members voted for a rise and one for a reduction.

Read the full report here.