BOE Must Raise Rate Slowly as U.K. Avoids Slump, Sentance Says

Bank of England policy maker Andrew Sentance reiterated that the central bank should raise its benchmark interest rate “slowly” to combat inflation as the British and world economies avoid a double-dip recession.

The bank needs to “gradually move interest rates up in a slow way which will not destabilize business confidence,” Sentance said in an interview on Sky News television yesterday. “One of the issues I would highlight is we haven’t seen the same dampening effect on inflation that we’ve seen in previous recessions.”

Sentance has argued for an interest-rate increase to tame inflation, which unexpectedly exceeded the government’s 3 percent limit in August. Minutes of the Sept. 9 meeting, released today, showed policy makers overruled his call for higher rates for a fourth month as some officials said the probability the economy will need more stimulus has risen.

“We have to distinguish between unevenness of the rate of growth which we often get at this stage of the economic cycle and a genuine double-dip recession,” he said. “Certainly in the case of the U.K., I see that not as the main scenario, or globally as the main scenario.”

While Britain and other economies have seen “some unevenness in growth,” the U.K. is still on a “recovery track” aided by the pound being at “a competitive level,” Sentance said.

“Some of the indicators that I look at, which are based on what’s happening in business, do show that the climate has changed quite significantly,” he said.

Rate Decisions

The central bank has kept its benchmark interest rate at a record low of 0.5 percent since March last year and maintained its emergency bond purchase program at 200 billion pounds ($311 billion) since February.

“In the middle of last year, we really worried about the immediate effects of the financial crisis and the fact the economy was contracting and we had expected inflation to fall and even possibly turn into deflation,” he said. “What we’ve seen since then is the beginnings of a recovery, it’s a bit uneven, and we have seen inflation running above target.”

Sentance said “there is clearly a lot of uncertainty around and there’s some headwinds,” like the government’s planned budget squeeze, the largest since World War II.

Budget Effect

“It will have some impact on demand, but private-sector demand is a much bigger component of our economy than the government demand,” Sentance said, referring to the proposed budget measures. However, “over a period of time, I would expect unemployment to come down over the recovery even though the government is rebalancing. There is sufficient vitality in the private sector to take up the slack.”

Bank of England Governor Mervyn King said on Aug. 17 that the bank’s central view is that inflation will be “close to, or a little below” the 2 percent target in the medium term. Policy maker David Miles said last week that inflation will likely be volatile in the coming months.

“You’ll have to see the minutes of the Monetary Policy Committee come out tomorrow,” Sentance said in response to a question on whether anyone else on the committee agreed with his call for an interest rate increase. “I don’t want to pre-empt that, but a lot of the arguments I’m making are reflected in those minutes and obviously there’s a very significant debate going on here.”

“I certainly find that there is a respect for my views on the Monetary Policy Committee and indeed in the outside world as well,” he said.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net

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