Sentance renews call for rate rise

25 January 2011 | By Natalie Thomas

Sentance has voted a number of times for a rise in interest rates to 0.75%.

In a speech to the European Policy Forum in London last night, Sentance told the audience that the MPC needs to steer a middle course when it comes to global pressures on inflation.

He says: “We should be prepared to look through genuine one-off shocks. But when it is clear that global inflationary pressures, coupled with a substantial decline in the exchange rate and reasonably healthy growth of domestic demand are all contributing to a sustained period of above-target inflation, then the time has come to act.”

He says if the MPC does  not start to raise UK interest rates gradually soon, it risks having to do so more aggressively in the future – which could create a big shock to business and consumer confidence further down the track.

He adds; “The lack of a substantive policy response to persistent above-target inflation also enhances the risk of a loss of credibility in the inflation target itself and a loss of belief in the commitment of the MPC to achieving it.”

Sentance says he believes the Bank can steer a low inflation course through current global economic turbulence, just as monetary policy sought to counter the negative shock from the global financial crisis.

But he adds: “But to do so, we need to be prepared to adjust the settings of policy to reflect the change in the balance of risks in the world economy, which have shifted significantly over the past eighteen months – from recession to recovery and from global deflation to global inflation.”

He believes the credibility of monetary policy and its impact on price expectations is the third stabilising force which monetary policy can exert to maintain stability in the face of global shocks.

He adds: “If inflation expectations remain anchored at or close to the inflation target, disturbances to the inflation path should prove temporary, and it will be easier for monetary policy to ride out a temporary shift in inflation.

“But when inflation expectations are not well-anchored, it is much easier for an external shock to set off an inflationary wage-price spiral, as we experienced in the 1970s and early 1980s.

“The task of the MPC in dealing with global inflationary shocks should be made easier by the experience of low and stable inflation which has helped to anchor UK inflation expectations under the inflation target regime which has operated since the early 1990s.”

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