By Jason Theodorou
Bank of England Monetary Policy Committee member Andrew Sentance said on Tuesday that interest rates needed to be raised, to reflect an improvement in economic conditions. Mr. Sentance argued that the economy would see an erratic recovery, but that this did not translate to the risk of a double dip recession.
Mr. Sentance said that difficulties in the market should not be the main influence on decisions made by the MPC, and emphasised the need for the public to remain confident that inflation would stay at a 2.0% target in the future.
Consumer price inflation fell to 3.2% in June - a higher than expected figure - while core inflation moved back up to a record high. Mr. Sentance said that inflation has been above target in 36 of the previous 45 months, and that it had exceeded targets for 15 of those months.
Mr. Sentance said: '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. Again, that is not my view about the policy stance we currently need'.
Mr. Sentance stressed the need to adapt to the changing performance of the economy, and to learn the lessons of the financial crisis. He said that the inflationary impact of the weak pound may have been influenced by monetary policy and perceptions about future policy decisions.
He said: 'A year ago, the predominant worry was that inflation could be significantly depressed by the impact of the recession. That risk did not materialise'.
'While I’m not yet worried that we face a major and serious risk in the opposite direction, I do think we need to adjust the policy settings we put in place to head off the downside risks to inflation identified in the immediate aftermath of the big financial shocks in late 2008 and early 2009.”
The Bank of England has held its interest rate at a low of 0.5% since March 2009.
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