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.
, 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.''
ENDS
IEA spokespeople are available for live and pre-recorded
broadcast
Contact: media@iea.org.uk /
07763 365520
Notes to Editors
- 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.
