Bank of England policy maker Andrew Sentance signalled he voted for a half-point U.K. interest-rate increase again last week and said that financial markets suggest benchmark borrowing costs could reach 2 percent next year.
“You can look at what the City is expecting, what the financial markets are expecting, to get a guide” about interest rates, Sentance told Sky News yesterday. “Along with the rest of the Monetary Policy Committee, I believe in taking it one month at a time” though “the yield curve suggests getting up to somewhere round about 2 percent next year.”
With economists predicting that a government report tomorrow will show inflation stayed at the highest level in almost 2 1/2 years in March, Sentance said the bank must act to avoid losing control of consumer prices. He signaled that he kept up his vote for a third month to double the benchmark rate, currently 0.5 percent, against the majority of the committee that maintained it at a record low.
“I have argued in public that half a percent interest rate rise is justified and I still think that that’s the case,” Sentance said. “We need to begin to adjust interest rates in a gradual way,” he added. “I’m not sure I’m swimming against the tide because the balance of opinion has been shifting in that direction.”
The Bank of England kept its rate unchanged on April 7, as forecast by all 57 economists surveyed by Bloomberg News. Minutes showing how policy makers voted in the decision will be released April 20.
Consumer prices rose 4.4 percent in March from a year earlier, matching the gain recorded in February, according to the median forecast of 30 economists in a Bloomberg News survey. The Office for National Statistics will publish the data tomorrow at 9:30 a.m. in London.
“It’s creating difficulty for people in terms of rising food and energy prices and it’s creating a lot more concern in the media, and so you can actually observe that,” Sentance said. “If we continue to have higher headline inflation we are going to see this upward drift in pay increases continue.”
While the government’s increase in value-added tax on sales will have a “temporary” effect on prices, other factors coming from the global economy may not subside quickly and raising interest rates would help to address that, he said.
“It’s possible that a rise in interest rates does exert some upward pressure on the pound,” Sentance said. “It’s not going to take the pound back to the level it was three or four years ago and we could see some benefit from a gradual upward move in the pound in the sense that it’s going to reduce some of the imported inflation measures we’re seeing from oil and commodity prices.”
The pound rose last week to the strongest against the dollar since January 2010, advancing 1.4 percent to $1.6337.
Sentance said that the economic recovery is “continuing” even though it slowed down at the start of the year because of the sales-tax increase.
“I would expect growth to recover as we go through the year,” he said. “When interest rates start to move up I don’t think it’s just going to be one single move.”
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