High interest rates a 'price worth paying' to stop inflation, says Sentance
Andrew Sentance, outgoing interest rate hawk on the Bank of England's monetary policy committee, argues a rise would provide a long-term cure for UK economy
Andrew Sentance says the MPC is wrong to believe little can be done about inflation
The Guardian, Wed 25 May 2011 18.07 BST
A higher exchange rate and lower export growth would be a price worth paying to prevent an inflationary spiral gripping the UK economy, leading interest rate hawk Andrew Sentance has claimed.
Sentance, who steps down this month from the Bank of England's monetary policy committee, said his colleagues on the committee were wrong to believe there was little they can do to arrest inflation that has sent prices soaring by 4.5%.
With much of the UK's inflation generated by the 25% decline in the value of the pound – which has pushed up the cost of imported goods – a rise in interest rates, he insisted, would be a quick cure as it would quickly push up the value of the pound and bring down import costs.
He said: "Monetary policy affects the exchange rate – which in turn can offset or reinforce our exposure to rising import prices. And the demand climate and the price expectations of firms can affect how much of this imported inflation comes through to the consumer."
Sentance has consistently argued for a rise in interest rates to bring down inflation. Earlier this month the central bank indicated average price rises could exceed 5% before they start to fall.
It is 18 months since the Bank of England met its inflation target of 2%, when the consumer prices index measure of inflation jumped from 1.9% to 2.9% over one month, following a sharp rise in commodity prices.
The weak purchasing power of the pound has pushed up the cost of raw materials and imported services to almost double the level of consumer price inflation. Some companies have absorbed the rise in costs, taking a hit to their profits, while others have passed them on in the form of higher retail prices.
Bank of England governor Mervyn King has warned that a rise in rates would undermine an already weak economy and curtail a much-needed rebalancing towards exports.
King and a majority of the MPC have stressed to critics of their decision to keep interest rates at the record low level of 0.5% that prices would decline next year to the target level.
George Buckley, chief UK economist at Deutsche Bank, said Wednesday's GDP figures, which showed the economy was flat over the last six months with several key areas in decline, was a "deal-breaker for an early rate hike".
He said the "extremely weak" figures gave little reason to raise rates before November.
Speaking in Jersey to the local chamber of commerce, Sentance was adamant the consensus was wrong and a rate increase was part of a longer-term cure for the UK economy.
He said: "Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting.
"That not only poses a threat to the recovery further down the track, but it could erode the hard-earned credibility of the UK monetary policy framework – which would be very damaging for economic growth over the longerterm."
Andrew Sentance, outgoing interest rate hawk on the Bank of England's monetary policy committee, argues a rise would provide a long-term cure for UK economy
Andrew Sentance says the MPC is wrong to believe little can be done about inflation
The Guardian, Wed 25 May 2011 18.07 BST
A higher exchange rate and lower export growth would be a price worth paying to prevent an inflationary spiral gripping the UK economy, leading interest rate hawk Andrew Sentance has claimed.
Sentance, who steps down this month from the Bank of England's monetary policy committee, said his colleagues on the committee were wrong to believe there was little they can do to arrest inflation that has sent prices soaring by 4.5%.
With much of the UK's inflation generated by the 25% decline in the value of the pound – which has pushed up the cost of imported goods – a rise in interest rates, he insisted, would be a quick cure as it would quickly push up the value of the pound and bring down import costs.
He said: "Monetary policy affects the exchange rate – which in turn can offset or reinforce our exposure to rising import prices. And the demand climate and the price expectations of firms can affect how much of this imported inflation comes through to the consumer."
Sentance has consistently argued for a rise in interest rates to bring down inflation. Earlier this month the central bank indicated average price rises could exceed 5% before they start to fall.
It is 18 months since the Bank of England met its inflation target of 2%, when the consumer prices index measure of inflation jumped from 1.9% to 2.9% over one month, following a sharp rise in commodity prices.
The weak purchasing power of the pound has pushed up the cost of raw materials and imported services to almost double the level of consumer price inflation. Some companies have absorbed the rise in costs, taking a hit to their profits, while others have passed them on in the form of higher retail prices.
Bank of England governor Mervyn King has warned that a rise in rates would undermine an already weak economy and curtail a much-needed rebalancing towards exports.
King and a majority of the MPC have stressed to critics of their decision to keep interest rates at the record low level of 0.5% that prices would decline next year to the target level.
George Buckley, chief UK economist at Deutsche Bank, said Wednesday's GDP figures, which showed the economy was flat over the last six months with several key areas in decline, was a "deal-breaker for an early rate hike".
He said the "extremely weak" figures gave little reason to raise rates before November.
Speaking in Jersey to the local chamber of commerce, Sentance was adamant the consensus was wrong and a rate increase was part of a longer-term cure for the UK economy.
He said: "Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting.
"That not only poses a threat to the recovery further down the track, but it could erode the hard-earned credibility of the UK monetary policy framework – which would be very damaging for economic growth over the longerterm."