The Shadow Monetary Policy Committee (SMPC), operating under the Institute of Economic Affairs (IEA), has urged the Bank of England to lower interest rates, citing economic indicators that suggest the current policy is overly restrictive. This appeal comes just ahead of a crucial decision by the Bank’s official Monetary Policy Committee (MPC) on Thursday, November 7th, marking a potentially rare interest rate cut since the previous adjustment in March 2020.

The SMPC has voiced concerns that the Bank’s current monetary stance, which has not adapted to the recent cooling of inflation and slowdown in monetary growth, may now be hampering the UK's already limited GDP expansion. The committee points out that, despite earlier advocating for rate increases as early as 2021—criticizing the Bank’s perceived failure to anticipate inflationary risks—its position has shifted. For over a year now, the SMPC has contended that the Bank of England’s rate hikes were excessive and overly prolonged.

Recent data shows that the UK’s Broad Money (M4) supply has slowed since July 2023, a factor linked to decreased inflation and limited credit access. Governor of the Bank of England, Andrew Bailey, recently acknowledged that inflation has been declining “faster than expected,” reinforcing the SMPC’s viewpoint. The committee argues that if the Bank continues with a restrictive approach, inflation could dip below target, stifling economic growth unnecessarily.

With inflation now nearing the Bank of England's 2% target and UK government bond yields suggesting a long-term interest rate average of approximately 4.25%, the SMPC has questioned the logic of maintaining the Bank Rate at its current 5%. Committee members reached a consensus on aligning the Bank Rate more closely with the actual long-term real interest rates but differed on how quickly adjustments should be made. Some members expressed the view that the opportunity to avoid a significant undershoot of the inflation target might have already slipped by. On the whole, they felt that a modest reduction, possibly in the range of 0.25% to 0.50%, would suffice, given the current landscape of monetary growth—subdued, yet not alarmingly so.

However, two SMPC members advocated for a more decisive approach, proposing an immediate 0.75% cut to correct what they see as an entrenched policy error that has kept rates overly high.

Andrew Lilico, the SMPC's chair and IEA Economics Fellow, emphasized this stance, stating:

“The Bank is now claiming that inflation consistently undershooting its expectations is a surprise as inflation has fallen, just as it claimed it was a surprise when inflation consistently overshot the Bank’s expectations as it rose. Neither should have been a surprise and neither was a surprise to the Shadow MPC. The Bank should learn its lesson and pay more attention to movements in the money supply when such movements are large. For now, it should cut rates immediately to bring them back closer to a more neutral level. Tight policy serves no purpose at present.”

With voices within the SMPC warning that a failure to act could mean continued sluggish growth and inflation potentially falling below target, pressure mounts on the Bank of England to reconsider its approach. The upcoming MPC decision will reveal whether the Bank will heed these warnings and take a more adaptive stance or maintain its current course.