–Says Gradual Rate Rise Would Not Seriously Damage Recovery
–Hike Would Send Signal BOE Not More Tolerant Of Higher Inflation
–Important BOE Shows Has Not Taken Eye Off Inflation Ball
–Notes Capacity Utilisation High Given Early Phase Recovery
–Questions How Much Slack In Labour Market
–Says Government Austerity Plans Compatible With Recovery

LONDON (MNI) – A gradual rise in UK interest rates would not
seriously damage the economic recovery and would still leave the costs
of borrowing low, Bank of England Monetary Policy Committee Member
Andrew Sentance said tonight.

In the text of a speech to be delivered here, Sentance reiterated
his call for a gradual rise in rates, saying it was important for the
MPC to avoid the perception that it is becoming tolerant of higher
inflation.

“It clearly does not make sense to tighten monetary policy
dramatically in the current climate in a way which totally undermines
the growth of the economy. However, if interest rates were moved up
gradually from current levels, in a well-communicated strategy that was
understood by the public, the business community and financial markets,
the cost of borrowing would still be low in real terms and I do not
believe that the recovery would be seriously damaged”.

Sentance said that a small rise in rates could even help the
recovery by lifting the confidence of those dependent on income
from their savings.

“For the many UK households which rely on the income from
savings and investments, this could provide a powerful boost to
confidence by signalling the beginning of a return to more normal
economic conditions”.

Public credibility in the BOE and its inflation target had been
hard-won, Sentance said, adding: “it is important that this confidence
is not eroded by a perception that the MPC has taken its eye off the
ball and is becoming more tolerant of higher inflation”.

Sentance reiterated many of the arguments he has deployed in the
past in favour of a rise in rates, including the relative strength of
many parts of the global economy and international price pressures.

The official also cast doubts on the degree of slack in the economy
at present, noting that capacity utilisation in manufacturing seems
high given the early phase of the recovery while the relatively small
rise in unemployment during the recession might mean that there was
less slack in the labour market than estimated.

The economic impact of the government’s fiscal austerity programme
also needed to be seen in context, he said, noting that public spending
would continue to rise in cash terms over the next few years. He said
that the details of the spending review – which the government will set
out on Oct. 20 would hopefully ease the recent deterioration seen in
consumer and business confidence.

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

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