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Bank of England warned over inflation risk

Former Monetary Policy Committee member Andrew Sentance has warned the Bank of England over potential inflation risks, despite the current rate standing just below its 2 per cent target.

Writing in the Telegraph, Sentance says economic conditions now are similar to those which led to a period in the 1980s when inflation rose to 10 per cent and interest rates hit 15 per cent – largely because policymakers had not raised rates early enough.

While he accepts that “history never repeats itself exactly”, Sentance says there are “parallels” between current economic concerns and the situation immediately before inflation began to rise and Chancellor Nigel Lawson was forced to push up interest rates.

These include low headline inflation, a strong pound, a benign oil price environment, structural change in the financial sector and spare capacity in the economy.

Sentance says: “The present inflation rate of 1.9 per cent is only half a percentage point lower than the low point of inflation in the Eighties – 2.4 per cent – 28 years ago in August 1986. That was at the start of the “Lawson boom” which unfolded over the next three years and led to the early Nineties recession with inflation of 10 per cent and interest rates at 15 per cent.

“In the late Eighties, the government and the Bank took their eye off the inflation ball – which Nigel, Lord Lawson himself has subsequently acknowledged. A long period of high unemployment and the belief that there was plenty of spare capacity in the economy distracted the focus from the need to make timely rises in interest rates.”

He adds that it should be of “concern” to the MPC that CPI inflation has remained close to the 2 per cent target despite low wage inflation and other factors holding down price increases in recent months.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Oh God not this man again!!!!

    Not content with being the chief advocate of raising interest rates in mid to late 2007 when everyone else was begging the Bank of England to drop rates along he comes again with in my opinion another half-baked scenario.

    Surely he has realised by now that most of the high rates in the 70s, 80s and early 90s were caused by the need to support the exchange rate at an unrealistic level not to control inflation. When this policy effectively ended on the 16th September 1992 when the pound was forced out of the ERM all previous interest rate history became an irrelevant statistic,

    Please Mr Sentance wake up and smell the coffee!

  2. Keeping it real (after taxes and national insurance)

    The will they won’t they debate continues and one just has to look at the data to see that inflationary pressures are weak.

    1) The median salary since 2007 after taxes and national insurance has declined by 8-10% so if we have people that experience falling wages in real terms net of deductions where is this spending power coming from?

    2) GDP – while there is excitement that GDP is back to where it was before the crisis – this is small joy as compared to where we should be – there is a long way to go.

    3) Interest rates – while the repo rate and savings rates are below inflation; personal borrowing and mortgage rates are not

    So based on the above three factors raising rates seems a bit of a reality gap when we have high borrowing rates already and people experiencing an inflation adjusted decline in take home pay

  3. Lets keep it real

    1) Median take home pay since 2007 has fallen by about 8-10% – so people are seeing falling purchasing power – so no inflation here in fact the risk may be deflation.

    2) GDP – back to pre-crisis peak – this is great but we are well below where we should be given our trend rate of growth. The more important measure – productivity shows why rates need to remain on hold.

    3) Borrowing rates for mortgages and consumers are above inflation even though many savings rates and the BoE’s repo rate is not.

    So taking the above factors and using some ‘real’ evidence the case for raising interest rates seems weaker than that conveyed by the headlines.

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