Monetary Policy

SMPC Votes to Raise Interest Rates


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For Immediate Release. The IEA's Shadow Monetary Policy Committee (a group of leading economists that meets to monitor monetary policy and comment on other monetary matters) voted to increase interest rates at its April meeting.
A number of members believed that a 0.5% immediate increase was warranted because of the strength of the housing market but, after debate, members accepted a proposal to increase rates by 0.25% to 4.25%.

The majority of members felt that there were severe dangers to the UK economy arising from the level of house prices. Some members believed that interest rates should be raised to prevent a house price bubble getting more severe as there would be serious consequences for the economy if that were to happen and if the bubble subsequently burst. Other members believed that the rise in house prices was an indicator that monetary policy needed tightening to prevent inflation getting out of hand.

Members Roger Bootle, Dr. Lilico and Prof. Congdon believed that the situation was serious enough to warrant a 0.5% increase in interest rates. Three other members supported a smaller rise, with the likely rise in interest rates overseas being cited as another supporting reason for an immediate rise in UK interest rates. The strength of the US economy indicated that there would be a rate rise in the USA in the near future.

Other members of the SMPC, specifically, Prof. Minford, Prof. Capie and Dr. Warburton, believed that the level of house prices simply reflected real factors, such as a lack of supply and the buy-to-let phenomenon and that inflationary pressures and monetary growth were sufficiently subdued to make a rate rise unnecessary.

Overall, the SMPC voted six votes to three for a 0.25% rise in interest rates to 4.25%. A motion to increase interest rates by 0.5% was defeated, also by six votes to three.

Read the full report here.