The results of the latest Shadow Monetary Policy Committee (SMPC) monthly e-mail poll for the Sunday Times are set out below. Members of the Institute for Economic Affairs’ (IEA’s) SMPC speak in a personal capacity and their contributions are arranged in alphabetical order. The rate recommendations are with respect to the MPC rate decision to be announced on Thursday 7 July. On this occasion, five SMPC members voted to hold rates in July, while three voted for a ¼% rate cut and one for a ¼% hike.

The wider economic background is discussed in more detail in the quarterly SMPC minutes. The next quarterly SMPC meeting will be held at the IEA on Tuesday 19 July, and the minutes from this quarterly physical meeting will be released about a week afterwards.

Comment by Roger Bootle
(Economic Adviser to Deloitte)
Vote: Cut Rates by ¼%

The time has arrived to reduce interest rates. All the signs are that the consumer slowdown is intense and is unlikely to be reversed any time soon. Meanwhile, overseas markets, particularly in the Euro-zone, look likely to be soggy. Although it has risen, inflation is still just below the target and the increases have been due largely to one-off rises in oil and other commodity prices, rather than a response to excessive demand.

It is important for the MPC to set monetary policy to anticipate inflationary moves in the future, and if it does not cut rates soon, there is a serious prospect that inflation could undershoot the 2% target by a considerable margin. This reduction should be the first of many. I expect rates to reach 3.5% next year.

Although I vote for a cut now, for presentational reasons the Bank may well prefer to wait until August, which is an Inflation Report month. A reduction could then easily be associated with the crystallisation of the downside risks to growth, which the Bank has noted before.

Comment by John Greenwood
(Chief Economist, AMVESCAP)
Vote: No Change

Strength in particular sectors suggests that UK economic weakness has been overstated. Although retail sales, housing, and business investment have softened in recent months, there is plenty of strength elsewhere in the UK economy that warrants the continuation of monetary restraint. The labour market remains tight, the number of jobs continues to expand, and wage growth is buoyant. Consumer confidence, as measured by the GfK index, weakened in April and May, but was still higher than in any month of 2004 except January. In addition, government expenditure continues to expand vigorously (6.8% in the year to May). Finally, the 11.6% growth of M4 broad money in the year to May, and the 11.2% increase in bank and building society lending, implies rates are too low, risking a shift of these funds from the wholesale sector (and asset markets) to the retail sector (and goods and service markets).

Inflation could rise if sterling falls. Although the core CPI is only 1.5%, oil prices are likely to stay firm, pushing up costs across the economy. The headline CPI is currently marginally below target, at 1.9% in April, and manufacturing output prices remain on a plateau (up 2.7% in May). Both could rise further as sterling falls.

Capacity constraints. A temporary easing of growth when the economy is close to full capacity does not justify rate cuts. Previous episodes of resurgence in consumer demand caution against easing policy too soon.

Comment by Dr Andrew Lilico (Europe Economics)
Vote: No Change

The MPC would have more scope for rate cuts now if it had raised rates around the turn of the year. If the MPC had raised rates more late last year or earlier this, now would probably be the time for cutting. But with monetary growth still so strong, as highlighted by the Governor recently, and with little sign of relief in commodity prices, it still seems reasonable to expect that inflation will rise over the coming months. On the other hand, recent retail sales growth has been very modest, and quite a significant slowdown in consumption (probably associated with the slowing housing market) might yet feed through into prices in the medium term. It is unclear how these factors will play out. There may yet be a case for further interest rate rises, although it seems unlikely that the MPC will agree, given that it has not raised rates when the case has been much stronger in recent months. But if the next moves are down, we should recognise that the scope for cuts will be limited by the likely tendency for inflation to be rising. Interest rates can have a powerful effect upon the economy through changes, as well as levels, and the MPC’s reluctance to raise rates further recently has limited its scope to make downwards changes. Perhaps that is why it is discussing the possible effectiveness of Maradona-style bluffing…?

Comment by Professor Kent Matthews
(Cardiff Business School, Cardiff University)
Vote: No Change

MPC’s ‘do nothing’ policy is working. In the face of conflicting signals on the state of the economy, the current ‘do nothing’ policy of the Bank of England is not only appropriate, it also appears to be working. The real side continues to send out signals of a slowing down, while the monetary side, with double-digit M4 growth in May, continues to signal future expansion and inflationary pressure. The speed at which market sentiment adjusted from expectations of a rise in interest rates, to a fall, now expected in the autumn, is another indicator of the difficulty in interpreting the conflicting signals on the economy. With markets expecting a cut, a policy of holding interest rates will produce just the right amount of tightening that could see broad money slip back to single-digit growth. While money supply continues to grow at current rates, there is no argument for a cut; while the economy shows signals of increasing sogginess, there is no case for a rise. Keep interest rates on hold.

Comment by Professor Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Cut Rates by ¼%

MPC has purposely engineered the slowdown, but may have overdone it
It is clear that the UK economy is slowing, probably rather sharply. The Bank has certainly achieved its objective, if such it was, of puncturing household ‘over-confidence’ in economic prospects and the housing market. This slowdown has ‘made in Threadneedle Street’ stamped on its rear end. A recession looks unlikely, but cannot be ruled out if rates are not cut. Matters are not improved by uncertainty over what the government will do to resolve its persistent deficit. Tax increases are now widely expected. The Bank’s problem will be to revive demand so that it grows closer to the growth rate of supply, which may now have recovered to 3% with better productivity growth and faster immigration from New Europe.

Comment by Professor Gordon Pepper
(Lombard Street Research and Cass Business School)
Vote: Raise Rates by ¼%

Money indicators suggest that the economy is relatively buoyant
For several months the monetary indicators have been predicting that the economy will be more buoyant than non-monetary data suggest. So far this has not been surprising, because the time lag between changes in the money supply and the response of the economy is notoriously long and variable. The suggestion was that the economy would be more buoyant next year, rather than this. Nevertheless, the two sets of indicators usually come into line. It would not have been surprising if some real economy data had been revised upwards, or if the monetary data had become less buoyant. So far this has not happened. Monetary growth has, in fact, done the opposite and accelerated: the three-month annualised growth of broad money has risen to an eight-year high of 15.6%. Bank lending, although below its peak, grew rapidly over the same period, which does not suggest that people are repaying loans instead of spending their income on goods and services, as some have argued.

Asset prices are consistent with monetary laxity view: The effect of the buoyant monetary growth on asset prices has been in line with expectations. There has not been a crash in house prices. Financial institutions are struggling to find attractive investment opportunities. The price of agricultural land is higher than can be justified by farming profitability. The price of commercial property seems expensive relative to weak rental growth, particularly in the City of London office market where vacancy rates remain high.

Economy will rebound: The conclusion remains that the economy will, in due course, become more buoyant, and that the next move in interest rates will be upwards.

Comment by Professor Anne Sibert
(Birkbeck College)
Vote: No Change

Negative output gap will emerge in next two years. Recently released data include a small, but expected, downward revision in first-quarter GNP growth, a fall in manufacturing output and an increase in the trade deficit. The employment rate is unchanged from the previous quarter, but total hours worked declined and the claimant rate and inactivity rose. These signs strengthen a belief that the next two years will see an emerging output gap in the United Kingdom that will put downward pressure on UK inflation. May CPI inflation remained steady and slightly below target; house price inflation has stalled; and there is no indication of a weakening in sterling.

The latest oil price shock. A jump in crude oil prices to over US$60 a barrel produces difficulties for monetary policy makers. If the rise is viewed as temporary, then uncertainty about the timing and size of the effect, the long and uncertain lags associated with monetary policy, and the dampening effect on economic activity, all suggest that following a monetary policy that is more contractionary than would otherwise be followed may do more harm than good. However, if the shock has a permanent component - as this one probably does - then monetary policy ought to be tighter than it otherwise would be: the higher prices of energy goods will increase consumer prices over time, as producers pass on their higher costs.

A rate cut may be needed. Current developments are not sufficient to make a case for a cut in the interest rate but, should the softening of economic activity persist, a reduction may be called for.

Comment by David B Smith
(Chief Economist, Williams de Broë plc)
Vote: No Change

Financial markets may have got ahead of themselves in anticipating European rate cuts. The Swedish Riksbank’s decision to cut its official interest rate by ½%, rather than the expected ¼%, on 21 June, the latest increases in the price of oil, and the fact that two MPC members voted for a rate cut in June, appear to have convinced the financial markets that both the ECB and the Bank of England might cut interest rates in the near future, even though the US Federal Reserve is expected to increase the Fed Funds rate from its present 3% to 3¼% on 30 June. The markets may be wrong about the ECB, which believes that the Euro-zone’s sluggish growth and high structural unemployment are due to the adverse effects of interventionist tax-and-spend policies, and would not be cured by running a laxer monetary policy. The much tighter demand gap in Britain suggests that a rate cut here would be even less appropriate than would be the case on the Continent.

Monetary background ought to rule out a rate cut, but oil price uncertainties suggest a hike would be inappropriate. In particular, excessive monetary ease in a supply-constrained British economy is more likely to induce higher inflation than increased output. British broad money supply growth, at 11.6% in the year to May, is more than twice the 5.2% recorded in the core OECD area in the year to April, and remains a serious concern. UK lending, excluding the effects of securitisations, has risen by 12.6% over the past year, and CPI inflation is nudging up against its central 2% target, having been 1.9% in March, April and May. The ‘old’ sterling index was 105.5 (1990=100) on 27 June, which is slightly high but not a level where a rate cut seems urgent. A British REPO rate cut on 7 July might represent a serious error, if the world economy bounces back towards the end of this year, although the uncertainties caused by the vagaries in the price of oil are such that the case for a rate rise is not overwhelming. However, the 4 August rate decision, when the MPC will have a new Inflation Report in preparation, is more likely to see a rate change than the July one.

Comment by Peter J Warburton
(Director, Economic Perspectives Ltd)
Vote: Cut Rates by ¼%

Fourfold evidence of UK slowdown warrants a rate cut. Evidence of a marked deceleration in the pace of UK economic activity is available now on four fronts. In the housing market, a 30% drop in housing market turnover has tilted the balance of power towards home buyers, and asking prices are drifting lower. The peak season for transactions has passed and it is now safe to cut the REPO rate without fear of reigniting speculative activity. Retail sales values have slowed from a 6% annual pace to a virtual standstill. VAT receipts are decelerating accordingly, and the growth of total tax receipts seems to have peaked. Finally, the labour market shows signs of stagnation outside the still-buoyant areas of business and financial services and public sector-driven demand for construction. In the monetary data, the slowdown is clear from the pace of household borrowing and the growth of M4 deposits of private non-financial corporations. Balance sheet expansion by the financial sector is responsible for the strong headline growth of M4, giving support to financial asset prices but posing no immediate threat to consumer price inflation. The private sector component of the Retail Price Index shows an annual inflation rate of just 0.8%. All in all, the evidence commends an easing of the interest rate stance.