At the July video conferencing meeting of the IEA’s Shadow Monetary Policy Committee (SMPC), the vote was seven to two to raise the bank rate. Six members wanted it increased to 0.25% immediately and one to 0.5%. Two members, however, voted to leave it at its current level of 0.1% for the time being.

All SMPC members wanted QE to cease immediately, and seven wanted it to be reversed. Concern was expressed that QE was effectively ‘accommodating’ nascent inflation tendencies and distorting financial market behaviour. There was no agreement on when gilts should start to be sold by the monetary authorities but broad consensus that it should be in a manner that did not create negative feedback to the economy, banks or financial markets.

There was broad agreement that the economy was on a sustained recovery path – risks to its pace notwithstanding – and therefore that the looseness of the monetary policy stance could not be justified. The risks to inflation from the recovery were increasingly skewed to the upside. As a result, there was a unanimous view that rates should be raised over the year ahead in small increments to a rate consistent in the SMPC’s perspective with the 2% annual inflation target in the medium term.

Members noted two other policy issues. One is that a focus on output gaps by policymakers seems to be leading to weaker expected future inflation in their forecasts than if they took more account of monetary indicators. The second is that long term decline in population growth and its shrinkage over the decades ahead in advanced economies like the UK implies that monetary expansion will have to slow in historical and absolute terms from current levels. If policymakers try to maintain the pace of financial activity irrespective of these long-term trends, then the risk of embedded inflation is even higher.