At its 25 October meeting, the IEA’s Shadow Monetary Policy Committee, a group of leading monetary economists that monitors developments in monetary policy, voted against changing interest rates by seven votes to two.

Members of the SMPC were concerned about short-term inflationary pressures arising from rising oil prices, but most members felt that now would be the wrong time to raise interest rates. A number of participants expressed concern about the medium-term outlook for inflation, particularly as the main money supply measures had been growing rapidly for some time. However, the majority of the members who took that view felt that the slowdown in the real economy would be sufficient to offset inflationary pressures. A rise in global saving and the likelihood of households reacting to their very high debt levels by reducing spending were also given as reasons for leaving rates on hold.

Two members, Peter Warburton (Director, Economic Perspectives) and Prof. Patrick Minford (Cardiff Business School) expressed fears of a potential economic slowdown and both wanted to cut interest rates. Peter Warburton said, “High levels of debt repayments and potential defaults on this debt mean that the economy is unlikely to be revived by modest cuts in the REPO rate.” Other members put the slowdown in the real economy down to ‘supply side factors’ such as higher oil prices, business regulation, higher taxes and increases in public sector employment, and believed that the Committee should concentrate on the inflation outlook, which did not merit a cut in rates. David B Smith (Chief Economist, Williams de Broë) summarised this view: “the output gap is narrowing from the supply side, regardless of what is happening to demand but, overall, there is no need to do anything aggressive at the current time.”

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