Sentance Says Rate Rise Needed to Tackle Accelerating Inflation

By Jennifer Ryan - Jan 24, 2011 10:00 AM PT


Bank of England policy maker Andrew Sentance said officials need to increase interest rates to keep price pressures from the global recovery and a weaker pound from getting entrenched in the economy.

“When it is clear that global inflationary pressures, coupled with a substantial decline in the exchange rate and reasonably healthy growth of domestic demand are all contributing to a sustained period of above-target inflation, then the time has come to act,” Sentance said in a speech in London today.

While food and fuel prices pushed U.K. inflation to 3.7 percent in December, the 10th month above the government’s 3 percent upper limit, the Monetary Policy Committee held the key rate at 0.5 percent this month to support growth. The central bank targets a 2 percent inflation rate and Sentance said officials’ refusal to curtail emergency stimulus may undermine their credibility and stoke further price gains.

“The lack of a substantive policy response” to consumer- price gains “enhances the risk of a loss of credibility in the inflation target itself and a loss of belief in the commitment of the MPC to achieving it,” he said.

The panel has split three ways since October, when Adam Posen said the bank should expand its bond-purchase plan to prevent inflation from slowing too much once a government spending squeeze takes hold. Posen last week described recent price gains as temporary, indicating he may keep pushing for more stimulus.

The Office for National Statistics may say tomorrow that U.K. economic growth slowed to 0.5 percent in the fourth quarter from 0.7 percent in the previous three months, according to a Bloomberg News survey of economists.