View more on these topics

Andrew Sentance: Interest rates may be set to rise

Former MPC member Andrew Sentance believes inflationary pressures may force the Bank of England to look at raising interest rates in the near future.

In a letter published by The Telegraph, the former rate-setter said the MPC may be set to do a U-turn over its attitude to inflation, a move which would prompt the committee to address interest rates.

Sentance (pictured) said the MPC has been relaxed over inflation in the past few years, having kept interest rates at 0.5 per cent and introduced a programme of quantitative easing which has seen £325bn pumped into the economy.

Sentance said the BoE has taken this stance because it felt the weakness of the economy in the medium term would see inflation fall back to the 2 per cent target once various shocks had left the system.

Sentance said news of inflation rising slightly from 3.4 per cent in February 2012 to 3.5 per cent last month has resulted in a change in stance from the BoE that may prompt a look at interest rates.

He said: “This was not a great surprise to me. Over a year ago, I warned that the underlying inflation picture was not as good as most of my MPC colleagues thought at that time. And when the MPC relaunched its QE programme last autumn, I warned that inflation could get stuck at around 3-4 per cent this year instead of falling below target as the Bank’s forecast suggested.

“Thinking on the MPC now seems to be moving in this direction. The minutes of the April meeting showed that “arch-dove” Adam Posen had dropped his call for more QE. In a subsequent newspaper interview, Posen was quoted as saying that the Committee was “taking seriously” the persistence of measures of “core” inflation at around 3 per cent.”

Sentance also highlighted BoE deputy governor Paul Tucker’s view that inflation was likely to remain above 3 per cent in the near future.

Sentance said there were four reasons why high inflation was likely to persist. These were strong growth in India and China continuing to put upward pressure on food and energy prices; the big fall in the pound pushing prices up further; spare capacity in the UK economy not applying the downward pressure the MPC had hoped for and finally rising prices were encouraging businesses and the public to expect higher inflation in future.

Sentance said: “These concerns are still valid. At the same time, latest evidence suggests that the weakening global economy and the euro crisis have not created a double-dip recession in the UK. Surveys point to a resumption of economic growth in the first few months of this year and the March retail sales figures suggest consumer spending is proving resilient. Unemployment is now falling again.

“The first official estimate of economic growth for January to March will be published this week. But whatever GDP shows, the evidence in the first quarter is that the economy is growing – slowly. Rising interest rates could soon be back on the agenda.”

Speaking to Money Marketing earlier this month, PSigma income fund manager Bill Mott said the Bank of England should raise interest rates when inflation falls below 2 per cent.

Recommended

1

Barclays CEO Bob Diamond agrees to stricter bonus terms

Barclays chief executive Bob Diamond has agreed to a change in the terms of his £2.7m deferred bonus for 2011 following pressure from shareholders. Earlier this month the Association of British Insurers issued an “amber top” alert to its members over Diamond’s £17.7m pay packet. Investor group Pensions & Investment Research Group also advised its […]

2

What advisers are saying: Relevant life policies

Back when Mad Men stalked Madison Avenue, marketing was something you did last. You came to Sterling Cooper Draper Pryce with your finished product and Don (after some heavy drinking, womanising and general misogyny) would think up a way to sell it. Things have changed. A couple of weeks ago, I noticed three new inclusions […]

NAPF supports call for QE probe

The National Association of Pension Funds has backed a Treasury select committee report calling on the Bank of England to explain the impact of quantitative easing on pensions. A report published by the TSC last week urges bank officials to provide an estimate of the overall benefit and loss to pensioners and savers as a […]

HMRC wins landmark film scheme tax case

HM Revenue & Customs has won a court victory over a film investment scheme’s proposed use of tax relief. The Times reports on a case involving a scheme called Eclipse 35, which had 289 investors who were looking to take advantage of a collective £117m tax relief on a £1bn investment arrangement with Disney. Investors […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. So we have increasing unemployment and external inflationary pressures that increased interest rates wont effect (apart from potentially reducing the cost of imports) and he thinks increasing interest rates will help?

  2. Agreed.The man appears obsessed, and his analysis is shocking. While wages are suppressed and the pound’s fall is so long ago that’s fallen out of the 12 month inflation calculation (indeed it’s now on an upward trend) interest rates will have to stay as they are. The downsides on a fragile economy (though the fantasist implies things are getting better) are multiple.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com