MPC member addresses inflation concerns

Bank of England policymaker, Andrew Sentance, today said the Bank of England’s Monetary Policy Committee (MPC) faces some “interesting debates” in the latter half of 2010 as high inflation persists.

The latest official data shows that British annual consumer price inflation (CPI) reached a 17-month high of 3.7% in April.

The CPI inflation rate is a benchmark for the MPC but last week, the Committee elected to keep UK interest rates on hold at the historically low level of 0.5% for the 15th consecutive month.

While the move was widely expected, Mr Sentance questions how long interest rates can remain at this historically low level.

Inflation is almost double the Bank’s 2% and has not fallen as quickly as expected. Despite this, most analysts expect no monetary tightening until the final quarter of the year.

According to Sentance, volatile oil prices have made controlling inflation difficult, as well as the pound’s weakness which has put upward pressure on import prices.

In an article for the Sunday Times newspaper, he said: “As spare capacity (in the economy) has not exerted much downward pressure on inflation so far, there must be a high degree of uncertainty about its future impact.

“And though some headwinds to growth will remain - including deficit reduction and weakness in some euro zone economies - these can be offset by growing confidence and momentum from private sector demand,” he said.

“This will make for some interesting debates on the MPC in the second half of the year,” he said.

“We could see the impact of lower wage growth on inflation with a lag and this partly underpins the bank’s forecast that inflation is likely to fall back to target and drop below it over the next year or so,” he said.

Mervyn King, Governor of the Bank of England has previously dismissed fears that soaring inflation would demand a significant rise in interest rates in the months ahead.

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