Monetary Policy

Abandon interest rates rises, says Shadow Monetary Policy Committee 


In the Media

Shanker Singham quoted by The Daily Mail

In the Media

Shadow Monetary Policy Committee quoted by the BBC

A further interest rate rise would risk damaging the UK’s fragile economy and is unnecessary to tackle inflation

  • The IEA’s Shadow Monetary Policy Committee (SMPC) voted (8-1) to keep the Bank Rate at 5 per cent. One member voted for an increase to 5.5 per cent.

  • An overwhelming majority voted to suspend or reduce the pace of Quantitative Tightening (QT).

  • Previous interest rate rises should be given time to take effect on inflation before further action is taken.

  • An immediate rate cut could create uncertainty and dent the Bank’s credibility.

A group of independent economists that shadow the Bank of England’s Monetary Policy Committee (MPC) have called for interest rates to not increase further. This comes as the Bank of England is expected to put up the Bank Rate from 5 per cent to 5.25 per cent today (Thursday, 3 August).

The Institute of Economic Affairs’ Shadow Monetary Policy Committee (SMPC) have said that further rate increases could harm the UK economy. A majority of the SMPC also voted to pause Quantitative Tightening (QT) – a contractionary monetary policy that aims to decrease the money supply and slow the economy. This marks a shift from the SMPC’s May meeting when only two members voted to suspend QT entirely.

The one dissenting member argued that a further hike of 50 basis points was necessary to prevent inflation from “becoming embedded in the economy”. But the majority assessed that risk as low because of weak growth, a weakening labour market and the easing of supply-side pressures.

One member, economist Patrick Minford (Cardiff Business School, Cardiff University), said that getting inflation down from very high levels will be a long and slow process; and overreacting and over-tightening could damage the economy and spark a financial crisis. Another member, Juan Castañeda (Vinson Centre, University of Buckingham), highlighted the contracting money supply over recent months that will have a strong disinflationary pressure.

The SMPC was among the first groups to warn that loose monetary policy during the pandemic necessitated higher interest rates in July 2021. However, the Committee now says further monetary tightening should be paused until the full impact of recent rate rises and quantitative tightening becomes clear. The members, nevertheless, cautioned against an interest rate cut on the basis that the Bank of England has lost too much credibility in tackling inflation to do a volte-face.

SMPC members highlighted the reduction in lending to companies and financial institutions and the risk of a “payment shock” as 1.6 million fixed-rate mortgage deals are set to end by mid-2024 – resulting in some reduction in household spending. They also noted that headline inflation rates are already beginning to fall across developed economies.

Trevor Williams, Chair of the Shadow Monetary Policy Committee and former chief economist at Lloyds Bank, said:

”It will take some time for previous rate rises and falling global commodity prices to feed into lower inflation. But, in the meantime, further rate rises by the Bank of England are unnecessary and could do some economic damage without lowering inflation any faster.

“The UK economy is on the precipice of a sharper slowdown. There has already been a contraction in the money supply, with less liquidly available for loans, lower house price inflation, and slowing economic activity, as shown in the sharp fall in the Purchasing Managers’ Index (PMI) for manufacturing.”


Notes to Editors

Contact: [email protected] / 07763 365520

  • The Shadow Monetary Policy Committee (SMPC) is a group of independent economists whose purpose is to monitor the decisions of the Bank of England’s official Monetary Policy Committee and make its own policy recommendations.

  • The SMPC has met at least once a quarter at the Institute of Economic Affairs (IEA) since July 1997, making it the first such group in the UK.

  • It carries a pool of ‘spare’ members to ensure nine votes are cast each month. This can lead to changes in the aggregate vote, depending on who contributed to a particular poll. As a result, the nine independent and named analyses should be regarded as more significant than the exact overall vote.

  • The minutes of the April meeting can be found here: Minutes of the SMPC meeting of 11 July 2023.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.