Bank of England policy maker Andrew Sentance said the world economy will withstand the shock from the earthquake in Japan and political unrest in the Middle East, and predicted that inflation pressures will persist.
“I would expect these developments to have only short-term effects on global growth,” Sentance said in a speech today in Suffolk, England. “ Asia and other emerging markets are likely to continue to provide strong momentum to global growth, and the gradual recovery which is emerging in the U.S. and continental Europe should continue to gather momentum.”
Sentance said the global climate has become “more inflationary,” adding to the case for U.K. policy makers to raise the benchmark interest rate to keep faster price gains from feeding wage demands and creating a wage-price spiral. Data today showed inflation accelerated to 4.4 percent in February, the fastest since October 2008, and Sentance said it may exceed 5 percent this year.
With inflation “set to rise further, failure to take timely monetary policy action risks a more abrupt and destabilising rise in interest rates in the future,” he said. “There are upside risks to both inflation and consumption growth from a stronger rebound in wage growth as the recovery proceeds.”
The pound rose 0.4 percent today, and traded at $1.6374 as of 2:47 p.m. in London.
Sentance voted in February to raise the key interest rate a half point from a record low of 0.5 percent. His colleagues Spencer Dale and Martin Weale favored for a quarter-point increase. The remaining six members of the Monetary Policy Committee voted for no change. The bank will publish the minutes of this month’s decision tomorrow.
Manufacturing and unemployment data suggest the U.K.’s economic recovery survived the contraction in the fourth quarter and will continue, though the pace of expansion could prove “uncertain,” Sentance said.
An index of factory orders rose in March to the highest in three years, while price pressures intensified, the Confederation of British Industry said today. Claims for unemployment benefits are at the lowest since February 2009.
Sentance said growth in service industries won’t return to pre-crisis levels as the economy rebalances toward manufacturing. The government’s fiscal squeeze will also weigh on expansion as inflation damps consumer spending, he said.
Chancellor of the Exchequer George Osborne will tomorrow present his budget for the fiscal year through March 2012. He has vowed to stick to plans to eliminate the bulk of the deficit by April 2015. These include an increase in sales tax in January, which have also fed inflation pressures along with a weaker pound.
“With imported price pressures and VAT adding to inflation in the short term, we should not be surprised to see a squeeze on real incomes and relatively subdued consumer spending in the first half of this year,” Sentance said. “But if wage increases start to pick up more than current forecasts suggest in response to persistently high headline inflation, we are likely to see some combination of stronger consumption growth and higher medium-term inflation.”
The policy maker, whose term ends in May, said U.K. policy makers are facing decisions that are “much less straightforward than they appeared to be before the financial crisis.”
“The global climate is now more inflationary,” he said. “It seems unlikely that the margin of spare capacity in the U.K. economy will prevent current inflationary pressures from becoming embedded, without monetary policy being tightened.”
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