Cut interest rates by at least 0.5% this week, says IEA’s Shadow MPC

A group of independent economists who shadow the Bank of England has called for interest rates to be cut substantially and immediately. Analysts expect the Bank’s Monetary Policy Committee to cut the Bank Rate by 0.25% to 4.5% at its next meeting on Thursday.

But the Shadow Monetary Policy Committee, hosted by the free market think tank the Institute of Economic Affairs (IEA), argues that the UK faces a period of weak growth if the Bank fails to cut rates aggressively.

The IEA’s Shadow Monetary Policy Committee (SMPC) voted unanimously to cut Bank Rate.
A majority voted to cut the Bank Rate by 50 basis points to 4.25% immediately, with additional support for a smaller cut of 25 basis points coming from three members.

THE IEA 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% 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 0.25% 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.”

 

Bank of England set to cut interest rates this week

 

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