–Says Majority MPC See Weak Demand, Output Gap Bringing Inflation Down
–Sentance: BOE Has Allowed Sterling To Fall By More Than Needed
–Worries MPC’s Credibility Has Already Been Eroded
LONDON (MNI) – Bank of England Monetary Policy Committee Member
Andrew Sentance says in a speech today that his differences with the
majority on the committee have become ‘significant’ and warns that their
reluctance to raise rates may already have eroded the BOE’s credibility.
In the text of a speech to be given in Manchester, Sentance takes
issue with the oft-reiterated view of the MPC majority that weak demand
and the output gap will over time bear down on inflation pressures.
“The view that spare capacity and weak demand will bear down on
inflation in the future still underpins the majority view on the MPC,
despite the evidence that this is not what has happened over the
recession and the early phases of the recovery”.
Sentance noted that he had first started to support a rate hike
last June and that his backing for an increase could no longer be seen
as ‘tactical’ but reflecting a significant difference of view with that
of the majority on the committee.
“I don’t think such a persistent difference of view with the
majority on the Committee can be described as tactical. It reflects
significantly different views on the outlook for inflation and growth in
the UK and how we should respond as a monetary authority”.
Sentance points to business surveys as well as employment data to
show that the economic recovery continued into the early months of 2011
following the weather-impacted Q4.
“The indicators from manufacturing industry continue to show strong
growth on the back of buoyant export markets and activity is also
expanding in the services sector, albeit at a relatively modest pace”.
It was likely that upward pressure on UK inflation coming from
global inflationary pressures was “likely to continue for some time”,
Sentance said.
“Rises in energy and commodity prices are clearly part of this
pattern, and they may continue. An oil price of $150 barrel and perhaps
higher is quite conceivable. And we should not be surprised to see
these inflationary pressures transferred to more general increases in
the prices of manufactured goods imported into the UK”.
These pressures could not be seen as “one-off shocks which will
fade away” but were strongly linked to strong growth in Asia and other
emerging economies.
Sentance also attacked the way in which sterling had been allowed
to depreciate by the BOE – by more than was really needed to help the
economy survive the recession.
“Sterling’s depreciation since 2007 has added significantly to
imported inflationary pressures in the UK economy and this is
particularly unhelpful at present when we are seeing a renewed surge of
energy and commodity price inflation. And the resulting squeeze on
disposable incomes is clearly a factor holding back the growth of
consumer spending in the short-term, offsetting the boost to growth we
might be seeing from improved trade performance”.
Nor is it likely that industry is in a position to exploit the fall
in sterling to significantly boost export volumes, Sentance said:
“In the short-term therefore there is limited scope for an
expansion of UK manufacturing output without major investment in skills
and capacity – which is consistent with the picture shown by business
surveys of capacity utilisation in manufacturing such as the CBI’s
Industrial Trends Survey released today.”
Sentance is due to attend his last MPC policy meeting in early May.
His place will be taken by Goldman Sachs’ economist Ben Broadbent at the
June meeting.
“In the short-term therefore there is limited scope for an
expansion of UK manufacturing output without major investment in skills
and capacity – which is consistent with the picture shown by business
surveys of capacity utilisation in manufacturing such as the CBI’s
Industrial Trends Survey released today.”
Sentance also said he was concerned that the BOE’s credibility
could already have been undermined by its failure to raise rates.
“And as I prepare to leave the Committee at the end of next month,
I do worry that the MPC’s credibility and commitment to the inflation
target may already have been eroded by not adjusting policy settings
soon enough – as the challenge for monetary policy has shifted from
preventing deflation to curbing inflation and from halting recession to
managing the recovery”.
–London newsroom: 4420 7862 7492; email: ukeditorial@marketnews.com
[TOPICS: M$B$$$,M$$BE$,MSSFX$]
