Britain’s soaring inflation is not down to temporary pressures and rates need to rise now to avoid more aggressive action in the future, a Bank of England policymaker has warned.
Andrew Sentance – who has been a lone voice on the Bank’s Monetary Policy Committee in calling for a rate hike – said in a speech “the time has come to act” and warned the Bank risked losing vital confidence in its ability to keep inflation to target by failing to increase rates.
His comments come amid mounting pressure on the Bank as inflation rises more than expected, leading to fears of a damaging price rise spiral.
Mr Sentance’s warning also pre-empts a key speech by Bank Governor Mervyn King on Tuesday, which is expected to lead a robust defence of the Bank’s view that inflation is caused by one-off factors.
The majority of the nine-strong MPC – including Mr King – have so far failed to back Mr Sentance’s vote for a quarter point rise in rates.
Mr Sentance has voted for a rate rise from emergency lows of 0.5% to 0.75% since June last year to stave off the threat of inflation.
His calls are beginning to gain more credence as inflation strays ever further from the 2% target, up again in December to 3.7%.
But the Bank has stuck to its central view that inflation is being driven by temporary factors, such as the January rise in VAT and volatile commodity prices, and will return to target in the medium term.
Its argument is beginning to wear thin as inflation has risen faster than the Bank forecast and as growth slows – leading to fears of a period of so-called stagflation.
Mr Sentance said: “It would be a mistake to label all the global factors affecting inflation as one-off short-term disturbances and to see the medium-term influences purely in terms of domestic factors.”