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Last week the Bank of England’s Monetary Policy Committee (MPC) voted by 6 to 3 to keep interest rates at 5.25 per cent. However, the three dissenters favoured another quarter point hike.
What’s more, Governor Bailey doubled down on the view that rates will have to remain higher for longer, saying ‘it is much too early to bethinking about rate cuts’.
Perhaps he was responding to the Shadow Monetary Policy Committee (SMPC), an independent group of economists who meet at the IEA. At our last meeting we voted by 7 to 2 to cut rates. |
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| | | Overcorrection… The IEA’s Shadow Monetary Policy Committee concluded that slowdown in the money supply means inflation could fall below target and cause a recession — and are now calling for a cut in interest rates. |
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| The disagreement boils down to the weight that should be placed on the monetary aggregates. Not everyone on the SMPC would describe themselves as a ‘monetarist’, but we are more likely to agree with Milton Friedman’s famous remark that “inflation is always and everywhere a monetary phenomenon”.
We are therefore concerned by the recent collapse in the growth of ‘broad money’, or M4, which is essentially the UK private sector’s holdings of notes and coins, deposits and other short-term financial instruments which are similar to cash. Worryingly, the annual growth of M4 fell to minus 4.2 per cent in September.
The Bank attributed this slump to the unwinding of the impact of the liability-driven investment (LDI) crisis a year earlier. However, the underlying trends have been weak for some time.
The SMPC fears this is an early warning that deflation (falling prices) may soon be the bigger threat. This would be the mirror image of the Bank’s earlier mistake in underestimating the upside risks to inflation when money growth was soaring (as the SPMC warned at the time).
The Bank is also relatively sanguine about the impact of its policy of Quantitative Tightening (QT) – the selling of government bonds bought during the previous policy of Quantitative Easing (QE) – even though this is depressing the growth of bank deposits and raising long-term interest rates.
The real MPC has therefore kept its bias toward raising interest rates further, based on its judgement that the risks to inflation are skewed to the upside, and stepped up the pace of QT.
But if these upside risks fail to materialise, it won’t be too long before rate cuts are back on the agenda. In the meantime, the Bank would have done better to keep all its options open. |
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Julian Jessop IEA Economics Fellow |
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| Shadow Monetary Policy Committee co-Chair Andrew Lilico, The Daily Express | Risky business… Leaving interest rates unchanged risks deflation and, ultimately, recession. |
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| | | Let’s circle back… If the Bank has called this wrong, it won’t be long before the prospect of interest rate cuts are back on the agenda. |
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This week, the IEA published Dictating words: The Culture-Control Left and the war against free speech, a new paper by IEA Head of Cultural Affairs Marc Glendening, which warns that hate speech laws have been used to stifle open, democratic debate. |
Censorship advocates claim that certain viewpoints exercise coercive power — akin to an act of violence — and, therefore, must be silenced. This view has influenced public sector bureaucracies, big business, and politicians, including some on the Conservative side. It leads to support for ‘hate speech’ laws and the expanded definition of ‘harm’, which has the effect of criminalising peaceful and political expression. A new concept of free speech, focused on the intrinsic right of all individuals to express their opinions, regardless of their background or views, is necessary to overcome rising censorship demands.
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| | | Unequal treatment... Restrictions on speech are unlikely to be enforced neutrally, making discrimination against those with unpopular or marginal political views inevitable. |
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| | A slippery slope... Restrictions on open debate and the right to peaceful expression are the first steps towards undermining liberal democratic institutions. |
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| | | A two-way street… A free and prosperous democracy requires us to respect peoples’ equal right to speak, even if we don’t like the content. |
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| Shifting definitions… Concept like ‘hate’ and ‘harm’ have been redefined in law and weaponised against individuals voicing dissenting opinions. |
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| | Energy Analyst Andy Mayer, The Daily Telegraph | Look below the surface… ULEZ might be a well-intentioned attempt to internalise negative externalities. But in reality, the scheme redistributes money from the working poor, in return for negligible environmental benefits. |
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| | Director General Mark Littlewood, The Times | Investment repellent… The government’s over-reregulation of existing technology makes it likely that the UK will miss out on the potential benefits from innovations of the future. |
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| | Director of Public Policy and Communications Matthew Lesh & Professor of Institutional Economics in the School of Economics, Finance and Marketing at RMIT University Sinclair Davidson, IEA YouTube | The social responsibility of businesses… As businesses reconsider their approach to ESG, was it ever anything other than a luxury belief in the first place? |
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| | | Pocketing the change… ESG ratings were supposed to ensure sustainable corporate growth. But now it seems that ESG is counterproductive for its own cause and a drag on wealth creation. At least the consultants are getting paid… |
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| | Energy Analyst Andy Mayer, CapX | Turning a corner?… In ‘build nothing Britain’, 27 new oil drilling permits in the North Sea is a welcome relief. |
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| | | Don’t back away from the challenge… Emotive arguments and common myths surrounding the NHS shouldn’t stop free marketers from proposing alternative models. |
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| | Head of Lifestyle Economics Christopher Snowdon, Money Week | When nudge comes to shove… The much-maligned nudge theory has been used to justify extreme paternalism. But if policymakers in most countries truly embraced it, the world would probably look a lot more libertarian. |
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Tech Turmoil: Does the Digital Markets Bill threaten Britain’s economy? |
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Later this month, the IEA is hosting a panel to discuss the government’s Digital Markets and Competition Bill, building on the recent publication of Digital Overload: How the Digital Markets, Competition and Consumers Bill’s sweeping new powers threaten Britain’s economy.
Pannelists Matthew Lesh (Chair) Bim Afolami (MP for Hitchen & Harpenden) Stephen Hammond (MP for Wimbledon) Matt Sinclair (Senior Director at the Computer & Communications Industry Association) Verity Egerton-Doyle (Antitrust & Foreign Investment Counsel at Linklaters)
Date: Monday, 27th November Time: 17.30 – 19.30 Location: 2 Lord North Street, SW1P 3LB RSVP: Email [email protected] to request a space at the event |
IEA welcomes African partners |
| This week, we were delighted to welcome some of our partners from the Initiative for African Trade and Prosperity (IATP) to the IEA’s offices.
IEA Chairman Linda Edwards and International Programs Manager Jack Confrey paid tribute to our partners in Africa, and expressed their optimism about freedom in the world’s youngest continent.
Jack also joined Aimable Manirakiza of the Centre for Development and Enterprises Great Lakes in Burundi, Evans Exaud, Executive Director of Liberty Sparks in Tanzania, and Stephen OyedemI and Lanre-Peter Elufisan of OMINIRA in Nigeria, for a tour of the Palace of Westminster.
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Waging the war of ideas | Last weekend, Reem Ibrahim spoke at the Battle of Ideas festival about how Britains are overtaxed, Matthew Lesh spoke about the role of the state is an economic revival, while Christopher Snowdon joined a live panel for Spiked’s Last Orders podcast. |
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