Bank of England policy maker Andrew Sentance said a slowdown in inflation may prove short-lived as the pound’s weakness threatens to push it above 5 percent, bolstering the need for higher interest rates.
“There’s still quite a bit of evidence that there’s some further upward pressure on inflation to come,” Sentance, who has voted to increase interest rates every month since June, said in an interview yesterday in London. The U.K. is seeing “more imported inflation than we would have if the pound was a bit stronger and therefore that’s reinforcing the squeeze on consumer spending.”
Sentance, 52, said a boost to the pound from a rate increase wouldn’t be an “unwelcome development” in the fight against inflation. While consumer-price growth unexpectedly slowed to 4 percent in March, it’s still double the central bank’s target. The nine-member Monetary Policy Committee voted to keep its benchmark interest rate at a record low of 0.5 percent this month to aid the economic recovery.
“We’re going to see a further upward move in inflation through the summer” and “there’s clearly a risk that inflation goes up to 5 percent or a bit above,” Sentance said. He also said it’s not surprising to see “uneven” growth as the economy recovers.
He said the MPC may have underestimated the role of the weak pound as a conduit of monetary policy. The British currency has lost about a quarter of its value on a trade-weighted basis since the start of 2007, and Sentance said a boost from an interest-rate increase may help contain price growth.
The pound erased its loss against the dollar after the comments were published, and traded at $1.6357 as of 8:18 a.m. in London, little changed on the day. It was at 88.56 pence per euro, from 88.60 pence yesterday.
“My concern is that the pound has weakened beyond what is really necessary for the rebalancing of the economy and it’s actually contributing to inflation and making the macroeconomic management of the economy more difficult,” he said. “If a rise in interest rates began to counter some of that weakness of the pound, I wouldn’t see that as an unwelcome development in terms of controlling inflation.”
While the Bank of England and the Federal Reserve remain reluctant to increase interest rates, other central banks have started tightening policy to fight inflation. The European Central Bank on April 7 raised its key rate by a quarter percentage point to 1.25 percent, joining policy makers in China, India, Poland and Sweden.
“If we wait until all the signals on inflation are flashing amber and red, then I think that is too late to move interest rates away from what has been a very accommodative policy,” Sentance said. “So if we wait until wage growth is threatening the inflation target and we’ve got strong inflation coming from the world economy and the pound remains weak, that is a very worrying cocktail.”
The central bank’s committee has split four ways on policy. Sentance, who steps down at the end of May, has upped his call to a 50 basis-point increase from 25 basis points previously. Spencer Dale and Martin Weale voted for a quarter percentage point move last month, Adam Posen wanted more bond purchases, while the majority voted for no change. Minutes of this month’s decision will be released on April 20.
Sentance said the benchmark rate may not increase in the current cycle to as high a level as it was before the credit crisis, when they peaked at 5.75 percent in July 2007.
“I don’t think we can judge” what would be a normal level at this stage, he said in a separate interview with Bloomberg Television. “I don’t think it’s necessarily the sort of rates that we saw before the financial crisis. We have to take into account all the dislocation in the financial sector.”
U.K. gross domestic product fell 0.5 percent in the fourth quarter and data since then point to continued weakness in consumer spending. Sentance said GDP figures should be considered as one element of a broader picture rather than an “authoritative guide” to growth.
“We should not be surprised that growth is uneven and that there are fluctuations,” he said. “If you look at the broad picture from business surveys, the labor market, alongside GDP it looks like the recovery is continuing.”
Unemployment measured by International Labour Organization methods declined to 7.8 percent in the quarter through February from 7.9 percent in the previous three months.
Sentance, who will be replaced on the MPC by Goldman Sachs Group Inc. Senior European Economist Ben Broadbent, said policy makers now faces a more difficult environment than when he joined the committee in 2006. Rate-setters must remain focused on the inflation target, he said.
“The job of the MPC is not to steer the recovery, the job of the MPC is to keep inflation on target,” he said. “I do think the committee is in a more exposed position than it needs to be by not having taken earlier action and that will be something for the committee as a whole to debate and consider.”
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