Ahead of the Bank of England Monetary Policy Committee's (MPC) (external website) forthcoming decision on interest rates, due on Thursday 7 August 2008, Sunday Times economics editor David Smith reports (external website) on the latest quarterly meeting of the Institute of Economic Affairs' Shadow Monetary Policy Committee of economic experts.

According to Smith:

All the members of the SMPC were concerned about the current UK economic situation. [...] The grim prospects for future inflation led most members to want to hold interest rates. However, there was a significant minority who wanted to cut rates now as a result of the worsening situation.

SMPC member Ruth Lea (of Arbuthnot Banking Group and Global Vision), who was among those voting to hold rates, emphasised the critical importance of pay awards in the current context. According to the full minutes of the SMPC meeting (PDF format, 59.2K, external website), Lea noted that there are "some ominous signs that average wage settlements could begin to tick up". Lea continues:

The unions, empowered by their financial grip over the Labour party, are squaring up for tough and inflationary pay negotiations backed by industrial action. Even though I take the view that a price-wage-price spiral is still unlikely to develop, these industrial developments dictate monetary policy caution.

As Pay and Benefits Bulletin editor Sheila Attwood has recently noted, fears of a wage/price spiral would seem unlikely to come to fruition, with inflation expected to have fallen back by the time of the January 2009 pay round.

It will be intriguing to see how this Thursday's decision from the MPC squares with the SMPC's views, and what impact it has on the pay bargaining situation post-silly season.

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