Sentance lays bare Bank of England split over interest rates

The MPC's Andrew Sentance has slammed his colleagues' economic policy, arguing that they're wrong to keep interest rates and sterling down...

by James Taylor
Last Updated: 19 Aug 2013
Andrew Sentance, the only member of the Bank of England's Monetary Policy Committee who's been consistently voting for an interest rate hike, has apparently decided to up the ante. In a speech to the Institute of Economic Affairs, he launched a pretty outspoken attack on his colleagues' current approach, arguing that they are 'selling Britain by the pound' by their policy of keeping rates low and allowing the pound to depreciate in order to boost exports. Nobody ever said the MPC should always agree. But it's a bit alarming when some of the UK’s most distinguished economists have such opposing views on the best way out of our current predicament...

Inflation hit 4% in January, the Bank said this week - twice its official target. But although Governor Mervyn King admitted that it probably won't fall back to 2% until next year at the earliest, he’s been sticking to his guns that rate hikes would be a mistake; that the current level was due to temporary factors like the VAT hike and the spike in commodity prices, and would fall over time of its own accord due to the feeble state of the economy. In fact, he seemed to play down the likelihood of rates going up any time soon.

However, Sentance clearly disagrees strongly - still - and judging by the very public nature of this attack, is trying to attract more adherents to his cause (another MPC member voted with him in January; time will tell whether others followed suit this month). He reckons the Bank's analysis understates how bad inflation could get, and overstates the amount of slack in the economy (which would allow growth to pick up without impacting inflation).

King has talked previously about the need to rebalance the economy, which means letting the pound depreciate to help exporters. But Sentance reckons this has actually made inflation worse, and that 'there must be a concern that we have let the pound fall much further than this rebalancing requires'. The Bank should have raised rates sooner, he says; the danger is that by leaving it so long, they'll be left 'playing catch-up' when they do start hiking, and that could undermine the recovery.

Sentance's opposition to the current MPC strategy is hardly a surprise. And paraphrasing Genesis album titles within economic policy debate is, on the whole, inexcusable. But speeches like this will only increase the pressure on King and co to start hiking rates before too long...

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