Monetary Policy

Cut interest rates to avoid economic stagnation, says IEA’s Shadow Monetary Policy Committee


In the Media

Harrison Griffiths writes for The Critic


Julian Jessop quoted in The Express

The slowdown in money supply will cause economic damage unless the Bank of England changes course.

  • The Institute of Economic Affairs’ Shadow Monetary Policy Committee (SMPC) voted unanimously to cut Bank Rate and halt Quantitative Tightening (QT).

  • The SMPC voted to cut interest rates by 0.25 percentage points to 5.00 per cent, while one member went further by voting for a 0.50 percentage point cut to 4.75 per cent.

  • The SPMC is concerned that the Bank of England has not responded to the rapid fall in inflation, which is well below economists’ projections.

A group of independent economists that shadow the Bank of England has called for interest rates to be cut. This comes as analysts expect the Bank’s Monetary Policy Committee to hold Bank Rate at 5.25 per cent for the fourth consecutive time at its meeting today (Thursday, 1st February).

The Shadow Monetary Policy Committee, hosted by the free market think tank the Institute of Economic Affairs, argues that the UK risks a sharp slowdown or recession if the Bank fails to cut rates.

Starting in 2021, the SMPC made one of the earliest calls for the Bank to start raising interest rates and criticised the Bank’s forecasts for understating the threat of inflation. It now argues that the Bank is repeating its mistakes. Having successfully tamed inflation, the Bank now risks overkill by keeping rates too high for too long. If the Bank allows the money supply to continue falling in the long-term, it increases the likelihood of unnecessary economic contraction or even deflation.

The committee expressed concern that the Bank of England has not adequately responded to inflation rates, which are considerably below economists’ expectations. Julian Jessop, IEA Economics Fellow and committee member, emphasised that inflation is likely to reach the two per cent target by Q2 2024, a year-and-a-half sooner than the Bank’s forecast.

This is driven by the growth in broad money supply (M4) turning sharply negative since July 2023, meaning the availability of credit is contracting. Because price inflation is on track to hit its target earlier than expected, the Committee concluded that a failure to cut rates could hurt the UK’s growth prospects.

To increase the money supply, members urged an immediate end to Quantitative Tightening – the selling of bonds to contract the money supply and raise long term interest rates.

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

“The latest data suggests that the economy likely avoided recession in the last quarter of 2023, but only just. At best, the UK economy grew by around half a per cent in 2023. This pace of growth offers no threat to inflation. UK consumer price inflation has fallen from a peak of over 11 per cent to four per cent at the end of last year. Falling energy prices, weak economic growth, the contraction in money supply, and higher interest rates are succeeding in rapidly lowering price inflation.

“Forward indicators suggest a risk of a significant undershoot of the two per cent inflation target. The current inflation rate is well below what the official November forecasts suggested it would be at this point. Moreover, inflation will drop to two per cent or below a year ahead of projections. In that scenario, an immediate cut in interest rates is necessary and fully justified by the data.”


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 January meeting can be found here: Minutes of the SMPC meeting of 9th January.

  • SMPC member and IEA Economics Fellow Julian Jessop explained the link between inflation and the growth of Broad Money in a September 2023 article for The Spectator. Read the piece here: Is printing too much money the real cause of inflation?

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.