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Sentance Says House-Price Drop a Sign of Volatility

Bank of England policy maker Andrew Sentance
Bank of England policy maker Andrew Sentance said, “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.” Photographer: Jason Alden/Bloomberg

Bank of England policy maker Andrew Sentance said the record drop shown in the Halifax house-price gauge last month may show “volatility” instead of heralding a renewed property-market slump.

“For the time being I would regard that move in house prices you saw in the Halifax index, which wasn’t replicated in the Nationwide house-price index, as an indicator of volatility in the market rather than the start of a pronounced downward trend,” Sentance said in response to questions after a speech in London late yesterday.

The 3.6 percent price drop in September shown by Halifax, a division of Lloyds Banking Group Plc, contrasted with a 0.1 percent increase reported by Nationwide Building Society. While Sentance has argued since June that the economy is strong enough to withstand higher interest rates, his colleague Adam Posen said last month that it requires more stimulus.

“We’re bound to go through periods where there are periods of uncertainty,” Sentance said.

In his speech, Sentance reiterated his call for higher interest rates, saying that the longer the Bank of England keeps it benchmark rate at a record low, the more it puts its credibility at risk.

“It is important” that “confidence is not eroded by a perception that the Monetary Policy Committee has taken its eye off the ball and is becoming more tolerant of higher inflation,” Sentance said. “Unfortunately, the risk of such a loss of confidence and credibility appears to be increasing.”

3% Limit

Inflation held at 3.1 percent in September, exceeding the government’s 3 percent limit for a seventh month and above the central bank’s 2 percent goal.

“The current period of above-target inflation risks being prolonged by monetary policy which is too lax -- creating a climate in which higher inflation is not just the product of one-off shocks but becomes more deeply ingrained,” Sentance said.

Sentance’s view is also at odds with that of Deputy Governor Paul Tucker, who said in an interview with the Daily Mail that he is “more balanced” about inflation and the need to remove stimulus than he expected to be since the economy showed some signs of weakening. Until recently, Tucker regarded inflation as being “uncomfortably high,” the newspaper said.

He also said it isn’t “terribly surprising” that house price have “softened a bit. A few months ago it was surprising that they hadn’t fallen more than they did.”

Three-Way Split

The central bank this month kept its benchmark interest rate at a record low of 0.5 percent and held its emergency bond purchase at 200 billion pounds ($317 billion) ahead of the government’s planned spending cuts to reduce the budget deficit. Minutes of that decision will be published on Oct. 20.

Sentance “has so far failed to persuade any other MPC member to join him in voting for tighter policy, and our sense is that Mr. Posen may have similarly been unsuccessful in attracting supporters,” said Simon Hayes, an economist at Barclays Capital in London. He expects the MPC minutes to show a “three-way split and suspect this pattern may be evident for some time.”

Sentance said while the budget squeeze will have an impact on domestic demand, he sees “grounds for encouragement” in the pace of the recover so far.

“The improvement we have seen in the economy over the last year and the above-target inflation we have experienced point to the need to begin the process of withdrawing the very substantial level of monetary stimulus,” he said. “Such a policy should not be a threat to the recovery. In my view it is the key to sustaining the recovery.”


Sentance also said that the impact on inflation from higher commodity prices has been “amplified” by the pound’s weakness. The U.K. currency has fallen about 20 percent on a trade- weighted basis since the start of 2007.

“I believe we are likely to see continued upward pressure on inflation from global price pressures as the recovery in the world economy continues,” Sentance said.

Recent data has signaled U.K. economic growth slowed in the third quarter and policy maker David Miles said this week that officials must not tighten policy too soon and hurt an “immature” recovery. He also said asset purchases remain a “powerful tool” that “we may come to use.”

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