Andrew Sentance – a key member of the Bank of England’s Monetary Policy Committee – has
criticized the Bank’s own economic forecasts and argued that interest rates need to rise sooner than
currently planned to help tackle soaring inflation.
Sentance is one of nine members of the Monetary Policy Committee, which meets every month to
decide on whether to raise, reduce or hold the Bank’s base interest rate. The Committee has voted
to hold the rate at an unprecedented low of 0.5 per cent since March 2009.
However, Sentance has long been outspoken on his opposition to this policy – arguing that the base
rate should be increased to help bring inflation under control. Since last June, he has voted each
month for what he feels is a long overdue rate hike.
At a conference in London, he said: “My judgement is that the upside risks to inflation are
understated in the published fan charts. And monetary policy would most likely need to be
tightened faster and by more than the markets currently expect to bring inflation back to target.”
His comments are in opposition to Mervyn King, Governor of the Bank and chairman of the
Committee, who puts his stock in forecasts that more controlled rate increases – most likely starting
in May and increasing to no more than 1 per cent by the end of the year – will help cut inflation to
1.7 per cent within the next two years.
Sentance has slated some of the measures used in the Bank’s forecasts, and argued that the nature
of the UK economy means that interest rate policy needs to be considered against the global
context.
“This tendency to overweight the downward pull of spare capacity in the UK economy and
underweight the upward impact of external inflationary pressures has resulted in big upside inflation
forecast errors over a number of years,” he said.
“And it also underpins the over-optimistic assessment of the medium-term inflation outlook in the
current set of forecasts published yesterday.”
Most analysts expect the Bank of England to increase rates by a 0.25 per cent by June at the latest,
with a further hike before the end of the year.
