During last week's meeting of the Bank of England’s Monetary Policy Committee (MPC), members voted by a majority of seven to two to increase the Bank Rate by 0.75 per cent, to 3 percent. This marks the highest level since the outbreak of the global financial crisis in 2008. As stated in the MPC minutes, this increase will likely be followed by further rises in 2022 and 2023, though not to the peak level of 5.25 per cent in Q3 2023 that is currently priced into financial markets.

Even if it hasn’t received much attention, the Bank has started to sell gilts (‘quantitative tightening’) as announced earlier in November. Both the increase in policy rates and the sale of gilts will cause a decline in the rate of money growth broadly defined in 2022 and 2023. Excluding financial sector operations, the growth in the amount of money has already been decelerating in 2022 from the 15 per cent peak rate of growth in the aftermath of the pandemic, down to 4.7 per cent. This rate is compatible with maintaining price stability around 2 per cent over the medium term.

The minutes of the MPC reveal once again the lack of attention paid to the impact of changes in the amount of money on prices and the business cycle over the medium and long term. Instead, the Bank explains current inflation as a consequence of external shocks and changes in relative prices; as if the Bank’s policies since March 2020 have had no impact on the surge in inflation in 2021 and 2022. A monetary policy correction was urgently needed.

However, as much as the MPC disregarded the inflationary effects of their own policies back in 2020 and 2021, now they should be paying more attention to the impact of quantitative tightening and further rises in policy rates on the ongoing deceleration in broad money growth. It is clear that we must maintain a stable and moderate rate of growth in the amount of money to achieve a stable economy.

Dr Juan Castañeda
Director of the Vinson Centre (University of Buckingham) and Institute of International Monetary Research

THE ALTERNATIVE SMOKE-FREE 2030 PLAN

Last week, the IEA released 'The Alternative Smoke-Free 2030 Plan', authored by IEA Head of Lifestyle Economics Christopher Snowdon.



The paper comes in response to former Barnardo's CEO Javed Khan's prohibitionist plan to make England smoke-free by 2030. Khan's punitive measures included painting all cigarettes brown or green, annually increasing the age at which one can buy cigarettes by one year, and hiking tobacco taxes by over 30 per cent until a pack of cigarettes costs around £20.

Christopher's alternative plan proposes a reformist approach which would remove consumer barriers to accessing safer tobacco alternatives. For this to work, public health bodies must tackle pervasive misinformation about the risks of e-cigarettes, the EU-imposed Tobacco Products Directive should be reformed, and regulation should be relaxed on the sale of safer nicotine products. 

The paper acknowledges that the UK has generally regulated e-cigarettes sensibly, but argues that with a greater focus on articulating the benefits of switching to low-risk nicotine alternatives and relaxing the associated regulatory regime, smoking may truly become obsolete.

The paper can be read in full here and Christopher's YouTube explainer of his paper can be watched here.

iN THE MEDIA



Windfool tax... In his fortnightly column for The Times, IEA Director General Mark Littlewood argued that further windfall taxes on energy profits would be a mistake. Mark wrote:

“Raking off an even larger share of energy industry profits has a number of obvious political attractions. Portraying a plan to increase government revenues as being no more than taking an extra slice from “greedy corporations” is an easier soundbite than increasing the basic rate of income tax.



Time's up... In The Spectator, Christopher Snowdon advocated an end to the annual October clock change. Christopher posited:

“One peculiarity of the current system is that the clocks go back seven weeks before the shortest day (21 December) but do not go forward until thirteen weeks after it. On the day before the clocks go back, the sun rises at 7:48 a.m. The day before they go forward, the sun rises at 5:52 a.m. This ludicrous imbalance, which makes March unnecessarily gloomy, has always existed but was made worse when the EU pushed daylight savings time back to the end of March. At the very least, the British government should consider moving it forward to February.”

News of the day... IEA Acting Director of Communications Emily Carver appeared on last Tuesday's BBC Politics Live to discuss the week's pressing issues, including the government's plans to reduce public spending and raise taxes. Watch the full episode here.



The great college swindle... IEA Communications Officer Harrison Griffiths wrote for CapX on proposals to reform the higher education funding system. Referencing the IEA’s new paper, 'Setting Universities Free', Harrison noted:

“As the report lays out, taxpayers are forced to pay the £19bn per year upfront cost of tuition fee subsidies, of which around half will never be paid back – a liability insured by future taxpayers. Does the current system deliver a strong return on that investment? I’m afraid not. As with so many areas of government spending, we have been the victims of daylight robbery.”



Channel chaos.... IEA Head of Public Policy Matthew Lesh wrote for City AM on the failure to tackle the increase in Channel crossings, which he argues risks undermining the positive case for immigration. Matthew wrote:

"The danger is that boat arrivals drive a new toxicity in public debate, not only about asylum seekers but also immigration more generally. If we want to maintain a generous immigration and humanitarian refugee programme, it is necessary and righteous to stop those dangerous, irregular routes."



Online censorship bill... Matthew also wrote for The Spectator reminding readers of the threat that the over-regulation of the internet poses to civil liberties. Matthew commented:

"The most concerning part of the Bill, perhaps counterintuitively, relates to illegal content. The Bill requires all digital platforms, from Twitter to Mumsnet, to proactively scan user speech for a wide array of prioritised content and censor it using automated systems. Shockingly, this duty even applies to encrypted private messaging services like WhatsApp and iMessage."

IEA DIGITAL



Niemietz answers... In this episode, IEA Head of Political Economy Kristian Niemietz answers Google's most pressing questions on free trade. Kristian explains what free trade is, outlines the characteristics of a free trade economy, the impact of trade liberalisation and much more! Watch here.



IEA Podcast... In last week's podcast, IEA Head of Public Policy Matthew Lesh spoke to Daniel Pryor, Head of Research at the Adam Smith Institute, about Britain's immigration system, including failures at the Home Office. Watch here.

CALLING ALL STUDENTS!



Future thought leaders... We are delighted to announce that applications for our Future Thought Leader Programmes for sixth-formers and undergraduates are now open! There will be two weeks for sixth formers in April, and one in July. The undergraduate programmes will be in July and August.

You can find out more information on the programmes, and how to apply here.



Monetary policy essay price... Applications remain open for the monetary policy essay prize, organised by the IEA, the Institute of International Monetary Policy Research and the Vinson Centre at the University of Buckingham.

This year's question is: Are the central banks to blame for the current inflation episode?

To be in with a chance of winning up to £500, you must submit your answer by 6 January 2023. Further details on how to enter can be found here.