Policymaker Andrew Sentance continues argument for higher interest rates

| October 14, 2010 | 0 Comments
’Policymaker

Andrew Sentance, one of the Bank of England’s Monetary Policy Committee (MPC) members, has once again spoken of stubbornly high inflation.

Mr Sentance has, at the last four rate-setting meetings, voted for the base rate to be lifted, in order to combat high inflation.

He is expected to have voted this month for rates to be hiked - minutes of the meeting will be released next Wednesday, 20 October.

However, Mr Sentance has warned that the Bank of England faces losing its credibility if it is not seen to be fighting inflation - which at 3.1% has been above the 2% target for ten consecutive months.

In a speech in London yesterday, Mr Sentance said: “It is important that 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.”

The Consumer Price Inflation (CPI) rate is a benchmark for the MPC but the Committee continues to vote to keep UK interest rates on hold at the historically low level of 0.5% - where they have been since March 2009.

Mervyn King, the Bank’s Governor, recently said inflation will not fall below its target of 2% until the end of 2011.

The decision to hike VAT to 20% next year by the coalition Government will undoubtedly keep inflation higher, added Mr King.

Meanwhile, Mr Sentance added: “The current period of above-target inflation risks being prolonged by monetary policy which is too lax – creating a climate in which higher inflation is not just the product of one-off shocks but becomes more deeply ingrained.”

However, in contrast, fellow policymakers Adam Posen and Martin Weale are calling for more money to be pumped into the economy, via the quantitative easing (QE) scheme.

QE, also known as printing money, is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital

The Bank embarked on its £200 billion QE programme in March 2009, when the economy was in the midst of its worst recession in more than five decades.

Mr Posen argues that inflation does not pose much of a threat but is, instead, calling for action to boost the economy. According to Posen, more stimulus is required to help the recovery and to avoid a similar kind of slump which Japan experienced in the 1990s.

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