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Shadow MPC would raise rates in February

The Shadow Monetary Policy Committee has ruled by a majority of five to four in favour of raising the bank rate to 1 per cent on February 10.

At the quarterly gathering of independent economists, the five members who voted in favour of the rate rise outlined three major causes for concern that led to their decision.



The first has been described as the threat to the UK’s fight against inflation, based on what has been described as ’persistent overshoots’ of the 2 per cent consumer prices index target.



This has been highlighted as particularly relevant due to the 4.75 per cent inflation rate that is being recorded by the various retail price measures.



Additionally, the SMPC made the argument that the global economy is in fact closer to overheating than it is to depression.

The point was also made that any depreciation of sterling reflects the relative laxity of the UK’s monetary stance compared with other countries.

Despite these arguments in favour of a rate rise, the four minority members of the SMPC felt even a small rate hike could generate additional uncertainty for businesses.

This minority also felt that the fragility of the British banking system meant it would be unable to generate sufficient money and credit required to support the recovery.

The SMPC has not called for a rise in interest rates since they fell to 0.5 per cent almost two years ago.

Both sides agreed that both the Basel III proposals on bank regulation risked denting global supplies of money and credit. This created the possibility of a renewed global recession, the SMPC said.

The hike in VAT to 20 per cent is likely to squeeze living standards, members added, depressing household consumption.

A group of senior economists founded the SMPC in 1997 to debate the policy decisions of the Bank of England’s Monetary Policy Committee.

On this occasion, the SMPC’s view differed markedly from the official view of the MPC at its last meeting in January, which was to keep rates on hold.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Well done boys!!
    Has it ever occurred to you that bright ideas like this one are the reason why you are the SHADOW MPC and not the real one?

  2. William Kingsley 7th February 2011 at 1:51 pm

    Whilst the SMPC have more academic qualifications than most, they do seem a tad detatched from the things that are affecting Joe Public at the moment and putting up interest rates is not the right thing to do just yet. There is a massive squeeze on household budgets currently and higher rates will push more people to the brink with more reposessions depressing the housing market even further. VAT will add even further to prices along the supply chains and fuel costs are being pushed higher by VAT, speculators and a weak Sterling. Inflation is not being driven by the consumer so increasing rates will only squash a very weak recovery.

  3. When will some people understand that the problem with inflation at the moment is the fact that we are ‘importing’ it through higher commodity prices of most goods and there is nothing that the BOE can do about it! It is NOT demand led inflation – were this the case I could see the point in raising rates. We have a fiscal tightening in this country which will remain in place for several years that will ensure consumer spending remains subdued. Increasing BOE rates will do nothing to stop inflation, on the contrary it will add to costs which is counter productive to what is needed and will not help industry invest

  4. Strange comments John Lacy.
    Has it ever occured to you John that comments like those are the reason that you are not even on the shadow MPC?
    Unless you think 4.75% inflations a good thing?

  5. John Lacy, don’t forget that Adam Smith wrote the Wealth of Nations. The economics bible

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