LONDON (MNI) – Bank of England Monetary Policy Committee Member
Andrew Sentance says he is not seeking a tight monetary policy so
much as a gradual rise in Bank Rate which would avoid a sudden policy
lurch and risk destabilising confidence.

“I favour a gradual rise in Bank Rate which would be aimed to avoid
destabilising confidence through a sudden lurch in policy. ‘Tightening’
may be technically correct as the opposite of ‘loosening’ but it implies
that monetary policy might become objectively tight and restrain the
growth of the economy significantly,” Sentance said.

Explaining his currently hawkish position on the MPC, Sentance said
that the current economic situation was now very different from that
seen a year ago.

“There are four features of the current position of the economy
which are now very different from the situation we faced last summer –
the world economy has bounced back, the UK economy is also recovering,
the margin of spare capacity does not appear to be as large as we had
expected a year ago, and inflation has run above target rather than
falling below it”.

Sentance insisted that a double-dip recession is not on the cards
and that recent signs of slowing global growth suggested that the
recovery could be patchy – but this is not the same thing as a double
dip, he added. The world economy had in fact bounced back much more
strongly than had been forecast.

“There are still clearly uncertainties about the evolution of the
global recovery, and the data over the last month seems to be consistent
with some easing back in the rate of global expansion in the second half
of this year. But these worries about possible uneven-ness in the pace
of global growth should not be confused with signs of a ‘double-dip’
recession, which in my view is not on the cards. Rather, the world
economy has bounced back strongly from recession over the past twelve
months, and much more strongly than forecasts a year ago suggested.”

Sentance played down the recent jitters in financial markets,
emphasising that these were inevitable and should not be the dominant
influence on monetary policy setting:

“We may need to be prepared to live with this nervousness for some
time to come – and it should not be the dominant influence on the policy
and judgements of the MPC, which should be based on the performance of
the real economy and the outlook for inflation”.

Sentance said that it was a real question now “how long the
monetary policy song can remain the same” – “when it might be out of
tune with the rest of the background music from the real economy – of
economic recovery and above target inflation”.

Sentance noted that “spare capacity has not exerted much
downward pressure on inflation so far” so there had to be a “high degree
of uncertainty about its future impact”.

Global inflation pressures and the fall in sterling could well be
key factors in producing the recent high UK inflation, Sentance said –
pointing out that sterling has in fact been very weak indeed:

“One obvious reason for this higher level of UK inflation is the
weakness of the pound. Since mid-2007, the pound has lost nearly a fifth
of its value against the euro and has fallen by around 25% against the
dollar…looking back over the last three years, the pound has been the
weakest currency in the whole G20 group of currencies, declining more
against the US dollar than the Argentine Peso and the Turkish Lira”.

–London newsroom: 4420 7634 1624; email:
dthomas@marketnews.com/drobinso@marketnews.com

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