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Since 1997, members of the Institute of Economic Affairs’ “shadow monetary policy committee” have gathered once per quarter somewhere off Tufton Street, Westminster, to cosplay as their favourite Bank of England rate-setters. Much as scientists still puzzle over the mysteries of bird migration, no one knows exactly why they go to all the trouble.
SMPC meetings nevertheless follow a familiar pattern. After a summary of global economic conditions, members discuss the outlook for inflation and growth in the UK before pouring forth on the appropriate level of borrowing costs. Votes are tallied, a policy rate is recommended and the world keeps on spinning.
July’s meeting was mildly more interesting than usual, however. Minutes show that for the first time in over a decade the SMPC requested a face-to-face meeting with the BoE governor:
Philip Booth [IEA Senior Academic Fellow and St Mary’s University] said that there was a time when the Governor of the Bank of England hosted meetings with the SMPC to elicit the views of its members. This occurred under the watch [of] Governor Mervyn King.
Given the bank’s desire to widen its exposure to a diverse range of voices, he suggested that the Chairman write to the Governor and mention our past engagement and that we would be happy to meet them again. Andrew Lilico agreed to action.
The IEA declined to share a copy of Lilico’s subsequent letter to the BoE, though it did send us the following statement from the man himself:
In the past, as part of the usual stakeholder engagement, the SMPC has met with the Bank. As per the recent SMPC minutes, we have asked about engaging again in future. This is an appropriate time given the Bank’s renewed interest in the role of money in the economy. The Bernanke review emphasised the need to engage with more external thinkers to avoid the repeat of past forecasting mistakes.”
The SMPC cannot be pigeonholed as hawks or doves. In 2021 our focus on the money supply meant we saw inflation coming and pushed for more rapid rate rises through 2022. But from early 2023 we became more dovish than the Bank, arguing that the money supply was shrinking too fast to justify raising rates as high as the Bank did, and that rates should have been cut much earlier than they eventually were.
Another SMPC member assured FTAV that any correspondence with the bank would be “confidential and off the record”. A BoE spokesperson said they don’t “typically provide any commentary on the governor’s diary” but that Andrew Bailey was pretty booked up for the next three months.
Many readers will already be familiar with the IEA. Formed in the mid-fifties and inspired by the work of Friedrich Hayek, the free-market think tank slash “educational charity” shot to prominence in late 2022 when former PM Liz Truss’s attempts to implement several of its low-tax, high-spend policy ideas met with a somewhat mixed market reaction.
OpenDemocracy gives the IEA a “D” rating for funding transparency and several publications have reported the group’s financial ties to Big Oil and Big Tobacco. The IEA counters, via the FAQs page on its website, that it’s neither rightwing nor dependent on “any one source of funding”.
Presumably the SMPC is just as incorruptible. Eclectic members include former Invesco chief economist John Greenwood (who thinks “interest rates are irrelevant”), Capital Economics non-executive director Roger Bootle (who thinks “interest rates are fundamental”) and several card-carrying monetarists. (Ever the cynic, Louis wonders whether maybe the SMPC purely exists “just so every ten years they can slap each other on the back when the M4 and inflation charts overlay nicely”.)
The SMPC skews male — all 14 members are guys — and towards Wales — four, including “Brexit economist” professor Patrick Minford, work at Cardiff Business School. Juan Castañeda and Tim Congdon both divide their time between the Institute of International Monetary Research and the University of Buckingham while Lilico shares the chairmanship with professor Trevor Williams of Derby University and TW Consultancy when he himself isn’t moonlighting at consultancy Europe Economics.
A majority of the SMPC believe interest rates have been too high for too long, with the first majority vote for cuts having come last October when UK inflation stood at 4.6 per cent. Six voting members said the BoE should have lowered rates by half a percentage point in early August and two went so far as recommending a full percentage point cut. Over on Threadneedle Street, the real MPC has only lowered rates by a measly 0.25 per cent.
But it’s not just the current level of interest rates that vexes the SMPC. A majority of members also want quantitative tightening wrapped up post-haste.
Per July’s minutes:
John Greenwood said he votes firstly for the ending of QT because reducing the Bank of England’s balance sheet is equivalent to slowing the growth or reducing the quantity of money. And second, he votes for a cut in Bank rate to secure a broad money (M4ex) growth in the order of 4-5%. If the response is a rapid increase in bank lending which translates to a rapid increase in broad money, that would be a signal not to continue. But that would not be the case now.
As Toby pointed out in a piece on reserve tiering in June, there’s only one political party also calling for an end to QT and that’s Reform UK. Its manifesto says current policy is “negligently costing the taxpayer billions” of pounds.
Toby’s post gets into the nitty gritty of Reform’s proposals, which centre on transferring the BoE’s balance sheet into 75-year “Corona Bonds” while ditching remunerated reserves for the wider banking system to help fund public spending.
Reform MP Richard Tice may be hoping his old IEA acquaintances bang this drum on his party’s behalf if and when the SMPC’s meeting with the BoE takes place.