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Sentance says bank is playing catch-up

Sentance
Sentance: ’The risk is that when policy tightening does start, it will be overdure’

The Bank of England is too optimistic about how quickly raising interest rates will bring down inflation, according to monetary policy committee member Andrew Sentance.

Speaking at an Institute of Economic Affairs conference in London last week, Sentance said an expected rate increase would help to deal with inflationary pressures but action should have already been taken.

Sentance has been voting for a rate rise since July. He said the bank has been too optimistic about how quickly inflation will fall back below target.

He said: “We would be better placed to head off the upside pressure on inflation if we had taken earlier action.

“The risk is that when policy tightening does start, it will be overdue and the MPC will be playing catch-up which is not a good scenario for recovery prospects.

“One of the benefits we might see from raising interest rates is a modest appreciation of sterling, which would mitigate the impact of global inflationary pressures in the short term and help steer inflation back to target over the medium term.”

The speech follows Bank of England governor Mervyn King’s open letter to Chancellor George Osborne, published last week, to explain why inflation, which is now running at 4 per cent, is above the 2 per cent target. King blamed January’s VAT rise, sterling weakness and a commodity price boom.

King also hinted that rates could rise later this year.

Last week, Shadow Chancellor Ed Balls also weighed in against the bank, accusing King of being too political and warning him against tying his credibility to the Government’s “extreme” deficit reduction plan.

He said: “Central bank governors have to be very careful about tying themselves too closely to fiscal strategies, especially when they are extreme and are making their job on monetary policy more complicated.”

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