SMPC votes unanimously to raise bank rate this month

For a second consecutive meeting (16th January), the Shadow Monetary Policy Committee (SMPC) voted unanimously to raise Bank rate in February. Six of the nine wanted to see a rise of ¼% and three an increase of ½%. Furthermore, there was a unanimous bias to tighten. One wanted to see QE reversed, worried about the mispricing of risk in financial markets owing to central bank injections of liquidity and active buying of bonds.

Much of the desire for higher rates stems from the on-going strength of the global upswing and the belief that it will underpin the UK’s economic performance. But more directly, it was felt that the UK’s economic growth of close to 1¾% to 2% signalled that it no longer required ultra-low interest rates that were put in place to prevent the economy sliding further into recession following the global financial crisis.

Indeed, low official rates are now leading to too high financial market asset price inflation in some areas and distorting investment behaviour and inhibiting productivity. Also, above-target inflation, further falls in unemployment and a better than expected economic performance post the Brexit vote means that a move to normality in interest rates should get underway while growth seems robust enough to allow it.

That said, the consensus view on the SMPC of where ‘normality’ now is for Bank rate is well below its previous average. The range is anywhere between 1½% and 3%.

The SMPC is a group of economists who have gathered quarterly at the IEA since July 1997, with a briefer e-mail poll being released in the intermediate months when the minutes of the quarterly gathering are not available. That it was the first such group in Britain, and that it gathers regularly to debate the issues involved, distinguishes the SMPC from the similar exercises carried out elsewhere. To ensure that nine votes are cast each month, it carries a pool of ‘spare’ members. 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.

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