LONDON (MNI) – Bank of England Monetary Policy Committee Member
Andrew Sentance warns again tonight that a failure to raise interest
rates gradually risks a larger rate rise further down the road and
the loss of the MPC’s policy credibility.

In a speech to the European Policy Forum here, Sentance says:

“If we do not start to raise UK interest rates gradually soon, we
risk having to do so more aggressively in the future – which could
create a big shock to business and consumer confidence further down the
track. 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 also takes issue with the message adopted by the rest
of the MPC that a large output gap will bear down on inflation in the
medium term and help return CPI to its 2% target. He also suggests that
stronger commodity, energy and import prices should not be dismissed as
one-off effects.

“And many business surveys – such as the CBI Industrial Trends
Survey – suggest that the margin of spare capacity within firms is
already back in line with historical norms”.

Bolstering this argument is the fact that unemployment has not
risen during the recent recession current as much as during past
episodes.

“This better employment performance is welcome, but it means there
is less slack in the labour market than coming out of previous
recessions, with a heightened risk that wage increases will pick up with
the recovery”.

While Sentance said that the MPC is correct to look through one-off
effects on inflation and focus on returning inflation to target over the
medium term, he continues:

“…it would be a mistake to label all the global factors affecting
inflation as one-off short-term disturbances and to see the medium-term
influences purely in terms of domestic factors, such as the rate of
growth of domestic money supply or wage growth”.

Nor should the MPC look through the effect of the “large
depreciation of the exchange rate on inflation” – “if it feeds through
into a wider perception in the business community that price increases
can now be passed through more easily – not just for a while but in the
future too”.

Sentance continued: “In this sense, the recent jump in CBI price
expectations and other elevated measures of business price expectations
are worrying signals. They are an indication of a change in the pricing
climate which may make it more difficult to achieve low inflation when
some of the current price shocks have passed”.

“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”.

–London newsroom: 00 44 20 7 862 7492; email:
ukeditorial@marketnews.com

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