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.