–Adds Detail, Quotes To Earlier Versions
–BOE Sentance: US Structural Weaknesses More Acute Than UK
–BOE Sentance: No Global Sequence To Central Bank Policy Changes

BELFAST (MNI) – The trend around the world is towards higher
interest rates, and the current problems at the periphery of the euro
zone should be overcome by the economic strength of the area’s core
countries, Bank of England Monetary Policy Committee member Andrew
Sentance said in a question and answer session here.

Sentance downplayed the current euro area turmoil, said the global
economy was strengthening and repeated his call for the MPC to begin the
transition to higher rates.

Sentance has voted for a 25 basis point rise in Bank Rate and he
said he would not expect a move of that magnitude “to have a major,
destabilizing impact on the recovery.”

The MPC member believes, however, that a 25 bps hike should only be
the first in a string of increases, with the pace of tightening
depending on how the recovery progresses.

“I have also said that I see that (25 bps hike) as the beginning of
a transition over a period of time to higher interest rates and I think
the speed of that transition depends on how economic conditions will
unfold. It depends on … how the outlook for inflation unfolds,” he
said.

“And so I don’t think we can say exactly how slow, or quick, that
transition will be,” he added.

Sentance repeated his warning that if the MPC does not tighten
policy now, later on it could end up having to tighten more rapidly than
needs be.

“The worry that I would have is that we end up in a position that
further down the track the Monetary Policy Committee finds itself
needing to, or wanting to, increase interest rates at a faster pace than
I am suggesting now and I see that as a risk of a future shock,” he
said.

Sentance was asked if the MPC would wait for US Federal Reserve,
currently engaged in providing more stimulus, to shift policy before it
could start tightening.

He denied this, saying there was no sequence to the way central
banks move policy around the world, and he argued US structural
weaknesses were more acute than in the UK.

Sentance noted central banks in Canada, Sweden, Australia and a
number of Asian central banks had already raised interest rates.

“That is a reflection of … global economic conditions having
improved; that improvement has been more apparent in some economies than
others,” he said.

While the MPC takes its own decisions and does not formally
co-ordinate with other central banks Sentance said the economic factors
he has highlighted are the same ones causing central banks around the
world to hike rates.

These factors include “the improving global economy, improving
conditions in domestic economies and upward pressure on inflation from
energy and commodity prices and, in some cases, domestic pressures on
inflation.”

“I don’t think we should be surprised that this (higher rates) is
the direction we are moving as we get into the recovery phase of the
cycle,” he said.

“We are in an environment where the general global direction … is
towards higher interest rates but the pace of that is varying,” Sentance
said.

The US Federal Reserve has moved policy in the opposite direction
but Sentance said that the US economy suffered from its own structural
weaknesses.

“The United States faces some quite significant structural problems
coming out of this recession some of which may have been apparent before
the recession and the global credit boom may have even exacerbated some
of the structural problems of the US adjusting to the globalised
economy,” he said.

The problems for the US impact on its monetary policy but “in the
UK some of structural problems that are evident in the US are not so
significant.”

Credit Constraints Headwind To Recovery; Should Ease

Sentance is the only MPC member currently backing policy
tightening.

One member of the business audience questioned him about the
significance of bank lending spreads over the BOE’s Bank Rate being
markedly wider than before the credit crunch, with the market
effectively creating tighter monetary conditions. He was also questioned
over continuing credit constraints.

Sentance said the pricing and availability of credit was a
“headwind” to the recovery, but he believed the strength of that
headwind should diminish.

Sentance said there had been a number of reasons for the widening
in bank lending spreads. Some of it was simply “a re-pricing of risk”
but he said it also reflects the tendency of banks not to move as
rapidly or as far as a central bank if the latter moves Bank Rate
speedily and by large amounts.

“If we moved into a period when interest rates were gradually
rising, I don’t think we should assume that spreads between the Bank
Rate and the market rate would stay exactly as they are now,” he said,
predicting spreads could narrow.

“One of the things we factored into our forecast in the Bank of
England Inflation Report forecast is that spreads would narrow,” he
said.

Sentance said credit availability remained a major issue.

“You have got an influence on credit both from the supply side and
the demand side,” with people becoming more cautious about taking on
credit while banks have become more cautious about providing it,
Sentance added.

“Over the last 12 months or so the data we have had in the Bank of
England … has suggested there has been some improvement (in credit
availability),” he said.

“We should expect some degree of continuing headwinds from the
availability of credit but there has been evidence there has been some
improvement,” he said.

–London newsroom: 00 44 20 7862 7491; email: drobinson@marketnews.com

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