LONDON – Outgoing Bank of England Monetary Policy Committee
member Andrew Sentance has said that the MPC cannot ignore rises in
commodity prices and warned that last week’s correction in crude prices
was probably just a blip on an upward trend.

In his last speech as an external member of the MPC, Sentance told
an audience in Jersey that high commodity prices could feed into wage
bartering and price-setting and hinted that the MPC should move to
increase the value of sterling to combat imported inflation.

“The oil price is back above $100/barrel, and while there has been
a modest correction in commodity prices over the past month, this seems
likely to be a short-term pause in the upward trend rather than a
fundamental readjustment,” Sentance said.

“While we are in this phase of strong energy and commodity price
growth, there is also the risk that the inflationary trend could become
embedded in the rate of increase of wages and prices more generally.
That is a risk that cannot be dismissed lightly, given the experience of
the 1970s when this did indeed happen,” he said.

“So it is not right to argue, as some people have done recently,
that because inflationary risks and pressures arise from the global
economy they should be ignored by the monetary authorities,” he added.

“In the UK and in many other countries, monetary policy responds to
global shocks and influences all the time. Nor is it correct to argue
that inflation generated by import prices is outside the control of
monetary policy. Monetary policy affects the exchange rate – which in
turn can offset or reinforce our exposure to rising import prices,” he
added.

Sentance also warned that global oil production is working close to
capacity, suggesting crude prices have the potential to rise further.

“Some key commodity markets, including the market for oil, could be
in a structural position of scarcity for some time yet, leading to
further significant upward price movements,” he said.

Sentance also voiced fears that the services sector inflation may
have already slipped its anchor.

“UK services sector inflation has been running at around 4% for
much of the past decade, and has not shifted downwards to offset rising
goods prices. This raises the possibility that in the services sector,
high inflation expectations have already become engrained,” he said

In a parting shot at the MPC’s doveish members, Sentance, who has
persistently called for a hike in Bank Rate, said that tightening was
now long overdue, and warned the credibility of the UK’s policy
framework was at risk.

“As I come to the end of my shift at the helm of the UK economy, I
hope that my colleagues on the MPC will not allow the UK economy to be
blown too far off course by global inflationary winds before taking the
necessary corrective monetary policy action, which is long overdue,” he
said.

Sentance’s final monthly meeting, in early May, on the MPC ended
like the previous three, with him voting for a 50-basis-point hike, two
colleagues backing a 25 bps increase and the rest opting for no change.

-London newsroom: 4420 7862 7491; email: wwilkes@marketnews.com

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