Sentance renews push for rate hike

A policymaker at the Bank of England has stepped up his push for an interest rate hike and warned that his colleagues had understated the threat of soaring inflation.

Andrew Sentance, external member of the Monetary Policy Committee (MPC), said the Bank’s latest inflation report, published on Wednesday, was too optimistic.

In a speech to the Institute of Economic Affairs, Mr Sentance, who argued and voted in favour of a rate rise since last summer, said faster and larger rises were needed than the City had expected and the MPC was in danger of playing catch-up, which could damage the economic recovery.

The Consumer Prices Index (CPI) rate of inflation hit 4% in January, its highest level in more than two years and double the Government’s 2% target. Last week, the MPC held rates at a record low of 0.5% for the 23rd consecutive month.

The Bank’s quarterly report confirmed on Wednesday that inflation is expected to soar close to 5% before falling to the target in 2012 – but this was based on interest rates rising in line with market expectations, starting as early as the second quarter.

Bank governor Mervyn King and other MPC members have insisted inflation is being driven up by temporary price shocks, such as global commodity prices and the impact of the VAT rise last month, which will fade away.

But Mr Sentance, a former chief economist at British Airways, is unconvinced and reiterated the governor’s comments that “there are significant differences of view on the MPC at present”.

“My judgment is that the upside risks to inflation are understated,” he said. “And monetary policy would most likely need to be tightened fast and by more than the markets currently expect to bring the inflation back to target.”

Mr Sentance argued the weak value of the pound, which is driving up the price of imports, was key to current inflationary pressures in the UK. He also raised the question of the Bank’s credibility, which has been challenged in recent weeks as it has consistently missed its 2% target.

He said: “By raising interest rates sooner rather than later to help offset global inflationary pressures, the MPC can help reassure the financial markets and the great British public that we remain true to our inflation target remit.”