SMPC votes unanimously to Hold Bank Rate in August
and can they pass the Covid-19 stress test?
In its meeting of 14th July 2020, held by video-conference due to ongoing COVID-19 restrictions, the Shadow Monetary Policy Committee (SMPC) elected, by a vote of nine to zero, to hold rates in August. Five members favoured holding Quantitative Easing (QE) at its current level. Two favoured reducing QE. Three expressed a bias to raise rates as soon as recovery took hold.
The background to this decision is the worst recession in the UK since at least the Spanish Flu pandemic of 1918. And yet, at a 19% contraction in GDP that may yet not be as bad as feared earlier in the coronavirus crisis. It was noted that with a very large rise in the money stock coinciding with a very large fall in GDP, it should be no surprise that asset prices are rising.
Most members took the view that current policy action is directed at supporting the liquidity of fundamentally sound firms during a large temporary disruption. However, it was noted that (albeit understandably and perhaps intentionally) policymakers have “done too much rather than too little” and boosted asset prices. The Committee explored to what extent the (very large) supply shock component to the current contraction is likely to be enduring as well as temporary, potentially meaning policy is supporting large numbers of long-term unviable firms as well as firms facing only temporary problems. A number of Members took view the that rapid recent money growth will (growth in money demand notwithstanding) lead to more rapid inflation over the medium-term.
For now, however, the Committee agreed that policy should not change.