Sunday, July 05, 2009
Hold Bank Rate and extend QE, says shadow MPC
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

In its latest e-mail poll, the Shadow Monetary Policy Committee (SMPC) again voted unanimously to leave Bank Rate at ½% when the Bank of England’s rate setters meet on 9th July.

The unanimous SMPC vote reflected the belief that there was little case for a rate increase in the near future – even if one or two members were becoming slightly more trigger happy - combined with the view that ½% was close to the effective lower limit where the official interest rate was concerned. There was a widespread feeling among the members of the IEA’s shadow committee that Quantitative Easing (QE) was the only effective monetary policy instrument presently available to the authorities.

Several committee members believed that the present schedule of gilt purchases should be extended. Some members thought that an additional £100bn to £150bn of debt re-purchases was required once the current package had run its course.

The SMPC poll was largely carried out before the UK Office for National Statistics (ONS) announced a substantial downwards revision to its previous estimate of UK GDP in the first quarter of 2009, on Tuesday 30th June. The lower starting base tempered even further the modest hopes engendered by the early signs of ‘green shoots’ appearing in the economy.

One member pointed out that the shortfall of total OECD industrial production below its long-term trend was roughly twice as large in 2009 Q1 as it had been in any previous recession of the past half century. The size of this negative output gap limited international inflation risks in the immediate future.

However, there was some concern that relatively robust monetary growth in the OECD area as a whole posed a longer-term inflation threat. Several SMPC members discussed the difficulties of interpreting the UK broad money data when the figures were so heavily distorted by the deposits of other financial corporations.

Comment by Tim Congdon
(Founder Lombard Street Research)
Vote: Hold
Bias: Neutral but persist with Quantitative Easing to ensure that core M4 growth remains at, or above, 5% at an annual rate

Since the announcement of Quantitative Easing (QE) in early March many indicators of economic activity have improved and there are signs of a return to growth, even if only beneath-trend growth, in the third quarter. As one of the advocates of QE, I ought to be delighted by this turn of events. (I take QE to be the deliberate creation of new bank deposits by state purchases of assets from the non-bank private sector. In this particular case it is of course the central bank, not the government itself, making these purchases and the purchases are of government securities predominantly.)

However, the data are full of puzzles, some of which are disturbing. A major policy change has undoubtedly occurred. In the year to December 2008, net sterling lending (by UK M4 institutions, i.e., banks mostly) to the public sector was minus £13.6bn. By contrast, and in the year to May 2009, such lending was positive at £78.8bn. So whereas the state’s financial transactions actually destroyed money in 2008, in the first five months of 2009 they added over £90bn (or about 5%) to M4 money.

In my Council for the Study of Financial Innovation (CSFI) pamphlet How to Stop the Recession I argued that this creation of money balances by the state would ease balance-sheet strains in the private sector, partly by increasing the money holdings of genuine non-bank financial institutions - which would lead to a rise in asset prices if they kept money/asset ratios constant - and partly by increasing the money holdings of companies as such (which ought to be evident in their ratio of M4 money to their M4 borrowings). If QE were on a big enough scale, the result ought to be an ending of the recession.

In practice, M4 growth has resumed, even if the data are murky because of the role of the shadow banking system (i.e., the SPVs, conduits, etc.). But so far the extra money appears to have stayed in the financial sector, despite a surge of corporate fund raising. However, equity prices have done well since early March, while the commercial property market has begun to recover, so there is no problem there. My disappointment is that company money holdings remain stuck. If the data released on 29th June are to be believed they fell by £7bn in the three months to May and are roughly unchanged from the start of 2009. This is not what I was expecting.

These are still early days, but my initial interpretation is that the monetary situation in early 2009 was every bit as dangerous as the most pessimistic observers thought at the time - I must admit that I was certainly not as pessimistic as I ought to have been. If QE had not been announced, banks would have seen their balance sheets and their M4 bank deposits shrink by about 1% a month, compared with the ½% to 1% or so a month that was being registered in late 2008. A monthly fall of about 1% in money is roughly that recorded in the USA’s Great Depression, when M2 dropped by about 40% between October 1929 and March 1933.

QE has restored money growth at an annualised rate of about 5%, which is very good compared with what might have happened, but is frankly disappointing compared with my hopes in the CSFI pamphlet. Unfortunately, there are two official measures of M4 excluding intermediate OFCs for the time being because there is not enough detail in the monthly statistical forms to reconcile the monthly figures with the quarterly ones (the numbers are available from Martin.Udy@bankofengland.co.uk on request). However, the general message is broadly the same. Money was collapsing in late 2008, but has perked up in 2009.

The economic situation is improving, but remains fragile. I am in favour of keeping Bank Rate at ½% and continuing and probably expanding QE, so that the Bank of England purchases sufficient gilts to ensure that money growth runs at least at a 5% annualised rate. As before, it would be very sensible if the DMO and the Bank worked together, so that the Bank is not buying gilts sold only a few months (or even weeks) earlier by the DMO. The critical objective – while banks are ‘deleveraging’ and private sector financial transactions are destroying bank deposits at a rate of ½% to 1% a month – is that the state creates enough money by its own financial transactions to keep money growth positive. By ‘the state’ I mean the government and the central bank co-operating with each other to produce the best monetary policy for the economy – regardless of institutional reputations, turf wars, etc.

Comment by John Greenwood
(Invesco Asset Management)
Vote: Hold Bank Rate and maintain current quantitative easing targets
Bias: Prepare to extend quantitative easing beyond £150bn after July

The effects of QE are easy to see on the books of the banks. Reserves of commercial banks at the Bank of England have risen from around £20bn to £30bn before the credit crisis began to £138bn (as of 26th June). In one sense, this is the fuel that will enable banks to lend and invest in securities, when they are ready to do so, and when their customers’ appetite to borrow returns. However, other conditions must also be in place first. In particular, banks must be happy that they are adequately capitalised, and that the risks in new lending or securities purchases are justified.

The effects of QE are less easy to see in terms of their impact on households and non-financial companies. In April, M4 less money balances held by Other Financial Companies (OFCs) slowed to just 1.8% year-on-year. On a three-month annualised basis the rate accelerated to 5.0% from a trough of minus 3.4% in October 2008. Bank of England revisions to the monetary data are on-going, but monthly data that exclude the holdings of ‘Intermediate OFCs’ will only become available later this year. My judgement is that monetary growth - on this redefined basis - needs to be of the order of 6% to 8% p.a. from a long term perspective, although some temporary overshoot could be justified to compensate for the recent undershoot. This 6% to 8% long-term optimum rate contrasts with the excessive growth of bank and financial sector balance sheets in the period January 2004 to August 2007, when banks’ sterling assets grew at 15% p.a., and interbank lending and borrowing grew at 22.7% p.a. A side effect of this permissiveness was excessive growth of M4 in 2005-07.

In my view QE will need to be maintained and expanded in order to ensure the full effects are transmitted to households and businesses across the country. The Bank of England should therefore increase QE beyond the £150bn (or 7.4% of M4) that it is currently authorised to complete, requesting authorisation for a further £150 billion in asset purchases. In the meantime Bank Rate should be held at its current level of ½%.

Comment by Ruth Lea
(Arbuthnot Banking Group)
Vote: Hold
Bias: Neutral

Soon after the last MPC meeting there were two pieces of economic news which seemed to suggest that the ‘green shoots’ of recovery were indeed appearing. The Office for National Statistics (ONS) announced that April’s manufacturing output was up a tad and the National Institute of Economic and Social Research (NIESR) suggested that GDP in April and May might have increased marginally.

The GDP figure for 2009 Q2 could be a pleasant surprise. However, such an outcome should not be seen as so unexpected after the quite unprecedented collapse in stocks in the last quarter of 2008 and the first quarter of 2009, at the height of last autumn’s financial turmoil.

The hundred dollar question is of course whether a genuine, sustainable recovery is in the offing. And this is highly questionable. The consumer sector is still negatively affected by rising unemployment and the need to repair its balance sheet further. Exports will be curtailed by the continuing problems in the US and the Euro-zone – Britain’s main markets. At some point, but sooner one hopes rather than later, government spending will have to be cut. And, as the Governor of the Bank of England has been at pains to point out, bank lending remains weak and threatens to hold back recovery. Economic performance could well disappoint in the second half of the year and a better second-quarter GDP figure could be more of a blip than the harbinger of recovery. Under these circumstances, monetary policy will continue to remain very slack.

Unless the pace of weekly Gilt purchases slows, the £125bn allocated to QE will have been utilised by the end of July. One of the main issues at the next MPC meeting, therefore, is likely to be whether the MPC will vote for the remaining £25bn of QE to be utilised. This £25bn has already widely discounted by the markets. Perhaps of more interest will be any signals that the MPC intends to request an increase in the Asset Purchase Facility from the Chancellor. In the meantime I support the Bank’s policy of keeping interest rates very low and continuing with quantitative easing – including the remaining £25bn.

Comment by Andrew Lilico
(Europe Economics)
Vote: Hold
Bias: Neutral

There is much discussion at the moment about whether the economy has turned and, assuming the turn, how soon interest rates might start to rise again. All this discussion appears premature to me. If cutting interest rates by 5¼ percentage points, doubling the narrow money stock, and running a £200bn budget deficit had not resulted in at least a temporary upturn in the real economy, the economics profession would have little left to say. The issue was never whether the economy might experience a quarter or two of reduced decline or even slight growth. The question was whether this was a turning point or a temporary reprieve.

In my view the natural assumption is still that this is a reprieve. House prices still need to fall a further 20% or so, deleveraging by households has barely begun, the banking sector is so vulnerable that it could yet be driven into widespread default by even a moderate further shock, UK government spending is so exorbitant that it will certainly have a major effect upon the sustainable growth rate of the economy if it is not rapidly curtailed, and the UK government deficit is so wild that it must be brought under control rapidly, by tax rises if not spending cuts, if the government is to retain credibility with its creditors. All of this augurs ill for the future growth path of the economy. Even if there is not a further significant downturn (and my expectation is that there will be such), the chances of rapid growth in the recovery phase must be slim to none.

I continue to believe that it is by no means certain that the deflation danger has passed (In particular, I still have grave concerns about wage falls leading to prime creditor defaulting, and I think it remains to be seen whether there might not be a further credit crunch crisis in the late summer and autumn as there was in 2007 and 2008). We should thus maintain our current quantitative easing stance, and be ready to do more if necessary. Likewise, I consider it all but certain that there will be significant inflation on exit - once banks begin lending again the broad money stock is liable to rocket out of control. If inflation on exit is kept to only one year of 10% inflation, I would consider that a success and believe that policy-makers should be clear about their limited ambitions in this regard.

Finally, the inflation target in its current form is clearly now irrelevant and the framework should be replaced quickly. I recommend an average inflation target (a price-level path target) as I have these past ten years. But we do need something - even if only an indication of much more year-to-year flexibility in the annual inflation target - if we are to hope to manage exit from quantitative easing with only moderate volatility.

Comment by Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Hold
Bias: Neutral on rates but continue with aggressive quantitative easing

Based on the models of the economy that I use, it is about time that we should be seeing the beginnings of recovery across the world economy. This does seem to be happening, though some parts of the world are lagging behind others. Stock markets are reflecting this anticipated improvement in the situation pretty generally, even if they are now reasonably pausing. Risk spreads between official base rates and rates in the market place have come down. Surveys of purchasing managers and consumers have picked up. The improvement has yet to show up in output. However, and in the UK, the NIESR estimates of monthly GDP are flattening out, for example. It looks as if the second quarter of 2009 may show a flattening out in many other countries and in some, like China, faster growth. The reason for this turnaround lies in the rapid response to the world collapse induced by the Lehman bankruptcy in September 2008. That bankruptcy was the result of the US government’s decision not to support Lehman in its efforts to find a buyer (such as Barclays) at the time. Had it realized the effect of this decision, it might well have decided otherwise. Instead it and other governments around the world were forced by the resulting world collapse into massive fiscal/monetary support policies.

I would argue that these policies or ‘packages’ must be seen as essentially credit packages, not a normal fiscal policy ‘stimulus’ (which may well be quite ineffective in normal circumstances according to much evidence). In a credit crisis the only agent able to provide credit unavailable from the banks and the markets is the taxpayer. While central banks provided cash to the markets in exchange for whatever assets the markets could offer (‘quantitative easing’), permitted to do so by the taxpayer who picked up the risk on those assets, governments themselves were providing credit and capital to the banks themselves and more generally to the private sector via its greatly increased deficits. These deficits are credit because they too must be paid off in due course through cuts in spending or rises in taxation. This overall provision of credit by the government, whether through the central banks or directly on its own account, has been vital in staunching the wound to the economy caused by the Lehman-induced credit crunch.

According to the models I have been using the lags in effects from both the credit shock and the response are quite short- between two to three quarters before the peak effect. If we date the shock to the fourth quarter of 2008, the improvement in the second quarter of 2009 fits with this pattern.

However it by no means follows that the recovery from the crisis will be strong and vigorous or ‘V-shaped’. In my view this is most unlikely because of the fundamental reason for the growing problems in 2007 and 2008 that brought the world boom shuddering to a halt and so precipitated the financial conditions that brought Lehman down. This reason was the acute and growing shortage of raw materials in the face of the huge growth in the world economy and especially of China and its satellites. As the world economy recovers this shortage will reappear, indeed that is already visible in rising commodity prices.

Unfortunately this shortage is not quickly or easily remedied. It requires major technological change reducing the use of raw materials per unit of GDP, as occurred after the oil crises of the 1970s and early 1980s. Extra supplies of raw materials may also be brought on stream with some lag but the main need is in curbing demand. This could take a decade to come to fruition. Hence we should expect growth to be held back until this has happened. As occurred in the earlier period capacity that was viable at the old raw material prices will prove uneconomic at the new ones; cars, aeroplanes, factories and so on will need to be replaced with ones that are more resource-efficient. My forecasts therefore look for a resumption of growth but not back to the same path that we were getting used to in the mid-2000s. It seems likely that there has been a permanent loss of capacity and that there will be a slower rate of growth from that lower level.

As for policy, my view is that it should remain stolidly devoted to ensuring recovery for now - fiscal deficits must be tolerated, and quantitative easing continued. ‘Exit strategies’ are implicit in the commitment to inflation targets, which clearly imply that once recovery is not just firmly underway but also inflationary pressures beginning to appear on the horizon, then policy must be tightened; we should remember that the lags are not very long at all. But we are a long way from this situation and we cannot forecast when it will occur; meanwhile premature exit-type moves could badly delay recovery.

Comment by Gordon Pepper
(Lombard Street Research and Cass Business School)
Vote: Hold
Bias: Neutral but continue with the current programme of Quantitative Easing

The decision about interest rates is an easy one to make. There is a clear case for holding in July and continuing to hold in future. The more important decision is what to do about quantitative easing (QE). Is it too much, too little or about right? The aim is to stop a monetary contraction caused mainly by the collapse in bank lending. The correct way of judging it is to monitor monetary growth. The trouble is that the published data are heavily distorted. Transactions that are in effect within banking groups, that is, the deposits of what are now called ‘intermediate other financial corporations’ should be excluded. There are two ways of assessing what is happening. The first is to use the quarterly adjusted data now being published by the Bank of England. The second is to monitor the deposits of the private non-financial sectors of the economy (PNFSs). According to the Bank of England, the adjusted series grew by only 4.2% between the first quarters of 2008 and 2009, compared with 18.1% growth in M4. Further, experimental monthly estimates suggest that much the same rate of growth continued during the three months to May. This growth of just over 4% is not too high. If anything it is a little low. The indication is that QE has not been too much.

Turning to the PNFSs, this consists of households and private non-financial corporations (PNFCs). The combined M4 holdings have not grown at all during the last quarter. In particular the M4 holdings of PNFCs have slumped by £7.1bn. The private sector’s holdings of treasury bills, which have much the same liquidity characteristics as the Certificates of Deposit that are included in the definition of broad money, have however risen by £16.8bn. In normal times the changes in such holdings are trivial compared with those in M4 and it is not worth monitoring an aggregate broader than M4 that includes them. This is not the case in the current situation. The broader adjusted aggregate has risen at an annualised rate of about 8% to 9% this year, which does not suggest that QE has been too little. The conclusion is that QE has probably been about right and the programme should continue at the current rate pending further evidence.

Professor Pepper would like to thank Jamie Dannhauser, Senior Economist, Lombard Street Research, for his contribution to the detailed analysis.

Comment by David B Smith
(University of Derby and Beacon Economic Forecasting)
Vote: Hold
Bias: Downwards revisions to UK GDP data, released on 30th June, suggest that ‘wait and see’ is least damaging option

Britain has a small, open and trade-dependent economy and overseas developments have a more powerful and rapid impact on domestic economic behaviour than the monetary and fiscal levers controlled by the domestic authorities. The Organisation for Economic Co-operation and Develpment (OECD) have recently re-weighted and re-based their economic indicators for the OECD area. The new data make it possible to perform a health check on the current state of the industrialised economies as a whole. Their long publication delays mean that the OECD’s figures for GDP and its components are less relevant than the more timely monthly indicators, such as consumer prices, the money supply, and industrial production.

The production figures confirm that there has indeed been a catastrophic collapse in OECD industrial activity. In 2009 Q1, OECD industrial output was 16.5% lower than in the first quarter of 2008, which also happened to be the peak of the business cycle. Using the new figures, OECD industrial output appears to have had a trend rate of increase of almost exactly 2¼% since 1974, although it was previously 5¼% from 1962 to 1973. The 16.1% shortfall about this trend observed in 2009 Q1 was the largest negative figure on record. It is also a significant multiple of the previous troughs of minus 8.7% in 1975 Q2, minus 8.3% in 1982 Q4, and minus 5.3% recorded in 1993 Q3. The greatest positive deviation about this fitted trend was the plus 7.2% recorded in 2000 Q3. The OECD industrial-output gap was correspondingly 21¾% in 2009 Q1 if the all time peak is defined as 100%, as seems to be customary in such calculations.

However, while the collapse in OECD industrial activity invites comparison with the Great Depression of the early 1930s there is no sign of a similar monetary implosion. Instead,published OECD broad-money growth has remained remarkably robust since the present crisis commenced. There has only been a modest deceleration in the year on year growth from a peak of 9.1% in 2008 Q1 to 8.3% in the first quarter of this year and 7.4% in April alone, if formerly high inflation countries are excluded. Even the April growth rate is above the rates of increase recorded in 2004, 2005 and 2006 and it is not significantly below the 8.3% average recorded in 2007 and 8.5% in 2008. It can be argued that OECD broad money only avoided an implosion because of the extreme stimulatory measures taken by the leading central banks. However, it is also possible that the negative effects of the credit crunch were amplified by financial-market and media hysteria. This may then have caused the reduced business confidence that brought about the global de-stocking that induced industrial activity to collapse.

Measures such as ‘P-star’, which attempt to correct broad money for the trend increase in productive potential, also suggest that current OECD monetary growth is funding a positive inflation rate of around 4½% to 4¾% in the very long run, rather than the imploding price level feared by some people. This would represent a similar performance to that observed in the second half of the 1980s, before the so-called ‘Great Moderation’. Core OECD inflation was 0.9% in the year to 2009 Q1 and 0.5% in the year to April. However, the monthly figures for individual countries in May, suggest that the rate of price increase may have slackened off, or possibly even turned negative, subsequently.

A more parochial concern is the extent to which British inflation has remained stubbornly higher than that in other leading economies. This suggests that, if inflation picks up modestly overseas, there could be a serious knock-on effect in the UK. Britain’s CPI inflation was 2.2% in the year to May, when the annual rise in RPIX was 1.6% and that in the ‘double–core’ RPI excluding both mortgage interest rates and housing depreciation was an unchanged 2.5%. The equivalent CPI figure for the US in May was minus 1.3%, compared with minus 1.4% in China, minus 1.1% in Japan, minus 1.0% in Switzerland, zero in the Euro-zone, and plus 0.1% in Canada. One reason for Britain’s relatively high inflation rate was presumably the 9½% drop in the external value of sterling in the year to June. In which case, the pound’s almost 10% recovery since its March 2009 low-point – when it was 19% down on the year - must be regarded as a welcome development, even if it removes some of the competitiveness gains from British industry.

The uncertainties about: a) the outlook for global inflation, especially as to whether the negative output gap or rapid money growth eventually emerges as the predominant influence - one suspects that it will be the output gap first and money subsequently; and b) the future course of sterling, will make it very difficult for the MPC to make the right call over the next few months. The quite appalling fiscal background - and the Balkan-brigand style feuding between the regulatory agencies responsible for the health of Britain’s financial system - does not make monetary-policy decisions any easier. One can only recommend that the MPC endeavours to do as little harm as possible, while watching global and domestic developments like a hawk. Bank Rate should be held in the short-term, and the current programme of QE maintained – and, possibly, extended if the core monetary aggregates remain weak.

Before the release of the downwards revised first-quarter UK GDP figures on 30th June, I might have recommended that UK monetary policy should be tightened after the summer recess, starting with a Bank Rate increase before gradually stopping – but not initially reversing – quantitative easing. However, a downwards revision of 0.7 percentage points to the year-on-year growth rate, to minus 4.9%, in 2009 Q1 significantly changes the starting point. ‘Wait and see’ consequently appears to be the least damaging option presently available.

Comment by Mike Wickens
(University of York and Cardiff Business School)
Vote: Hold
Bias: Neutral now but raise in the longer term

There is no immediate pressure on UK inflation, but the long term prospect for inflation in the UK, the US and the Euro-zone is up. As inventory destocking is ending and the housing market is picking up, the UK recession appears to be bottoming out. The Bank is forecasting a fall in the CPI but at present it is still within the permitted range. Whether the Bank’s inflation forecasts are correct depends on future GDP growth which is still highly uncertain and a source of unusual controversy.

In the longer term, it will become necessary to reverse the monetary expansion in all three areas to avoid its inflationary effects. The balance sheets of the three central banks have all grown hugely. In the US and the Euro-zone especially, it is now clear that much of this has been to purchase government debt. In other words, there has been a huge increase in their money supplies to finance government expenditures. As output picks up this will become inflationary. The German government, with its strong aversion to inflation and budget deficits, is now strongly at odds with most other Euro-zone governments who have large government deficits and are using the ECB to fund them via their domestic banks. This creates considerable uncertainty in Euro-zone monetary policy and in EU inflation. A not too dissimilar situation holds in the US. There is therefore considerable uncertainty about the future inflationary environment surrounding the UK. Caution indicates a bias for raising rates before long.

Comment by Trevor Williams
(Lloyds TSB Corporate Markets)
Vote: Hold and spend the full allocation of £150bn in the Asset Purchase Facility
Bias: To cut Bank Rate further if required and request another £100bn for Quantitative Easing

On the surface, the M4 monetary statistics are looking better following the start of QE. After rising by just £4.6bn in March, M4 was up by £4.9bn in May. But the monthly growth rate has been stuck at 0.2%, and the annual rate has declined from 18.1% in March to 16.6% in May. After rising £30.5bn in March, M4 lending fell by £14.6bn in April, recovering to £25.0bn in May. But since these lending figures include the effects of securitisations, they should be excluded to give a better picture of underlying lending flows to UK borrowers. Doing this shows that M4 lending rose by £29.3bn in March, fell by £8.8bn in April but rose by £23.1bn in May, so not a big change to the trend.

We should also exclude the effects of the Other Financial Institutions (OFI) from M4 and M4 lending because they include so much inter-linked activity within the financial sector, including banks. If this is done, then M4 rose by just £0.4bn in May. This is better than the fall of £1.5bn in March but worse than the growth of £0.8bn in April. For May, this means that M4 lending growth (excluding securitisations and OFIs) was zero and just 2% up on the year before. On the lending side, there was a rise of £0.9bn in May after a repayment of £3.0bn of M4 loans in April. These are the sort of figures that justify the MPC decision to embark on QE, because M4 lending would have almost certainly been weaker without QE.

Looking at the details of how the aggregate M4 lending figure decomposes into the household and private sector non-financial corporations (PNFCs) in terms of their bank borrowing positions, shows that commercial companies continued to repay debt in May, but by a smaller £0.3bn in May after £0.9bn in April. The annual growth rate of M4 lending to the corporate sector was just 0.3% in May. Clearly, these figures are not compatible with an increase in private investment in the economy and so do not support any sustained economic recovery in the months ahead. For households, the figures for M4 lending are a bit better, with households borrowing a total of £1.2bn in May, after £1.5bn in April. It is true that banking sector deposits (reserves) with Bank of England have risen since QE, but the fact is that deleveraging by the UK private sector is continuing.

Signs of economic recovery in the real economy (retail sales, manufacturing output) and some rise in business and consumer confidence should not be interpreted as the start of a sustained economic recovery process but rather as a sign that the economic downturn has bottomed out for now. In short, the pace of the economic downturn is lessening but the prospect is for an extended period of weak activity. Hence, the need for the central bank to keep monetary policy loose is as urgent as ever. For these reasons, my vote is to keep Bank rate at ½% and to continue QE. Further funds may be required, and should be sought now, if the current situation persists beyond the summer months, as currently seems likely.

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.


SMPC membership

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other current members of the Committee include: Roger Bootle (Deloitte and Capital Economics Ltd), Tim Congdon (Founder, Lombard Street Research), John Greenwood (Invesco Asset Management), Ruth Lea (Arbuthnot Banking Group), Andrew Lilico (Europe Economics), Patrick Minford (Cardiff Business School, Cardiff University), Gordon Pepper (Lombard Street Research and Cass Business School), Peter Spencer (University of York), Peter Warburton (Economic Perspectives Ltd), Mike Wickens (University of York and Cardiff Business School) and Trevor Williams (Lloyds TSB Corporate Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that nine votes are cast.