The independent economists group which monitor the Bank of England has called for an immediate reduction in interest rates. Their recommendation comes as the Bank’s Monetary Policy Committee (MPC) prepares to meet on Thursday, February 6th, to decide on potential rate adjustments.

The Shadow Monetary Policy Committee (SMPC), an advisory group affiliated with the free market think tank Institute of Economic Affairs (IEA), has expressed ongoing concerns about slow monetary growth. According to the SMPC, the Bank of England has allowed monetary conditions to tighten excessively, which could lead to an inflation undershoot and a significant slowdown in GDP growth, potentially resulting in a recession.

The UK’s broad money supply (M4) saw a marked slowdown in 2023, leading to lower inflation and restricted credit availability. By September 2023, M4 (excluding intermediate other financial corporations) had contracted by more than 4% annually. Given the typical 18-month lag in monetary effects, the most significant economic impact is expected by March 2025.

Some SMPC members believe the opportunity to prevent a notable deviation from the inflation target has already passed. They argue that while monetary growth remains insufficient, it is not drastically below target, warranting a measured reduction in the Bank Rate by 0.25%.

However, the majority of the committee contends that more decisive action is necessary to prevent further economic deterioration.

Andrew Lilico, chair of the Shadow Monetary Policy Committee and IEA Economics Fellow, stated: “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% to 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.”

The upcoming MPC decision will be closely watched to determine whether the Bank of England takes action to address these concerns or maintains its current policy stance.