A group of independent economists that shadow the Bank of England
has called for interest rates to be cut. This comes amid
uncertainty about whether the Bank's Monetary Policy Committee
(MPC) will cut interest rates this week (Thursday February
6th).
The Shadow Monetary Policy Committee, hosted by the free market
think tank the Institute of Economic Affairs, has warned for some
time that monetary growth has been too slow and that the Bank of
England has allowed what is likely to be an undershoot in the
inflation target and potentially a sharp slowdown in GDP growth
or even a recession. Growth in the UK's
‘Broad Money' (M4) supply slowed dramatically in 2023,
bringing subsequent inflation down and reducing credit
availability. By September 2023 the standard measure (M4
excluding intermediate other financial corporations) had
contracted by over 4 percent annually. With the normal 18 month
lag the effects of this would have been expected to be most acute
by March 2025.
Several SMPC members felt that the opportunity to avoid a
significant undershoot of the inflation target has already
passed, and that on a forwards-looking basis monetary growth,
though still too low, is not dramatically so, meaning that a more
incremental approach of cutting Bank Rate by 25 was enough.
However, the majority view was that the situation demands more
decisive action to prevent matters from escalating.
Andrew Lilico, Chair of the Shadow Monetary Policy
Committee and IEA Economics Fellow, said:
"The Shadow MPC's view remains that the Bank of England has
made a serious mistake, over-compensating, by keeping policy too
tight for too long, for its previous error in 2021/2022 of
allowing over-rapid monetary growth and leaving policy too loose
for too long. When deviations in annual monetary growth from its
historic 4-5% norm are large, the Bank should pay close attention
to them. Instead, it has focused on metrics such as wage
inflation, concerned about 'wage spiral' mechanisms that
macroeconomic theory rejected as obsolete decades ago. We are all
about to pay the price."
