Sentance warns MPC’s credibility is on the line

THE credibility of the Bank of England’s monetary policy committee (MPC) may have been damaged by failing to tackle inflation by raising rates.

That’s the view of MPC member Andrew Sentance who is due to leave the committee at the end of next month.

Reading from a Bank of England-approved speech he told business leaders in Manchester yesterday that the MPC could face “a very difficult situation” later this year or next if it waited for the indicators of an upward drift in inflation to be “flashing red”.

“I do worry that the MPC’s credibility and commitment to the inflation target may already have been eroded by not adjusting policy settings soon enough – as the challenge for monetary policy has shifted from preventing deflation to curbing inflation and from halting recession to managing the recovery.”

Mr Sentance, who was speaking at a lunch held by the professional services lobbying group Pro Manchester, is a well-known MPC ‘hawk’ who has been gunning for an interest rate hike since last June and called for a 0.5% rise in April.

He thinks an increase is necessary to help curb inflation which is running at 4%, double the Bank’s target. It has been at 3% for most of the time since 2006, when he joined the MPC.

Mr Sentance also took the opportunity to stress his belief that sterling is too weak and is contributing to higher inflation. The Bank has been happy to support a weaker pound in the belief it is helping bolster UK exports, but Mr Sentance said there were limited benefits and UK exports were now not much higher than before the recession.

“There’s limited scope for short term increases in manufacturing output without investment in skills and capital,” he said.