Sentance continues to call for rate hike as MPC stands firm

18 August 2010 0:00 am | Updated: 18 August 2010 10:05 am | By Lee Jones

Monetary Policy Committee member Andrew Sentance continues to be the lone policy hawk for a rate hike after the latest decision to hold base rate at 0.5 per cent.

According to the Bank of England’s latest MPC minutes, Sentance called for a rate increase for the third time this year but the other nine members decided to hold monetary policy at 0.5 per cent with a £200bn of quantitative easing.

Sentance argued that the Q2 GDP data suggested the recovery was gathering momentum and the inflation outlook had shifted sufficiently to justify beginning to raise rates gradually.

But the other members judged that the weight of evidence continued to suggest that the margin of spare capacity was likely to bear down on inflation and bring it back to target in the medium term.

The minutes say: “The considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of sterling, should sustain the recovery. But the strength of growth is likely to be tempered by the continuing fiscal consolidation and the persistence of tight credit conditions.”

As the MPC admitted in August’s Inflation Report, inflation is likely to remain above the 2 per cent target for longer than judged likely in May’s assesment, in large part reflecting the prospective increase in the rate of VAT to 20 per cent in 2011.

It says: “As the temporary effects adding to inflation dropped out of the twelve-month comparison, downward pressure on wages and prices from the persistent margin of spare capacity would be likely to bring inflation below the target for a period.”

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