The Institute of Economic Affairs’ Shadow Monetary Policy Committee (SMPC) believe that the Bank of England is over focusing on current inflation and not enough on the sharp reduction in the money supply – which will bring inflation under control within the next two years, as shown by the Bank’s official forecasts.

In July 2021, the SMPC was among the first to identify the risk of inflation and call for an interest rate rise. But they now believe the easing of supply chain pressures from China’s ending of the COVID lockdown and easing of the supply side shock from the war in Ukraine, combined with weakness in the UK economy, means further tightening to reduce demand is unnecessary.

In reaching their decision, the SMPC was told there is no sign of a wage-price spiral and that inflationary expectations had fallen back. The MPC’s official forecast indicates inflation will significantly undershoot the two percent target in two years.

The two members that voted for a rate cut raised concerns that over-tightening and a squeeze on liquidity are contributing to bank failures, such as Silicon Valley Bank and Credit Suisse. There is a particular worry that the United States’ Federal Reserve paying interest on deposits is contributing to a liquidity shortage in the economy. Any further interest rate rise would risk more bank failures and subsequent demands for interventions such as Quantitative Easing.

Six members also voted for Quantitative Tightening – the selling of debt bought by the Bank from the private sector over the last 14 years – thus reducing liquidity in financial markets. This is to return normality to the futures curve and price risk without the distortion of the artificial boost that QE has given to capital market assets.

Trevor Williams, Chair of the Shadow Monetary Policy Committee and former chief economist at Lloyds Bank, said: “A further interest rate rise would be unnecessary to control inflation and could do serious damage to the UK’s economy. The Bank of England allowed inflation to get out of control by being too slow to raise interest rates. They are now making the opposite mistake.

“The recent bank failures in the US – and SVB UK – are a sign of too rapid a withdrawal of liquidity. Most members of the SMPC believe monetary tightening has gone too far and some of it should be reversed either through resuming Quantitative Easing or lowering the Bank rate. Doing both Quantitative Tightening and raising Bank rate further above four percent is morphing into monetary overkill.”