Former Bank of England monetary policy committee member Andrew Sentance believes that inflationary pressures may force the BoE to consider increasing interest rates in the near future.
In a letter published by The Daily Telegraph this week, Sentance said that the committee has been relaxed over inflation, having held bank rate at 0.5 per cent for 37 consecutive months and introduced £325bn of quantitative easing.
He said the MPC took these decisions in the belief that inflation would fall back to below 2 per cent once various shocks had worked their way through the system.
Burt he believes a U-turn may now take place as inflation rose slightly from 3.4 per cent in February to 3.5 per cent in March. He pointed to four reasons why high inflation may persist.
These include strong growth in India and China, putting upward pressure on food and energy prices, the big fall in sterling during the recession, which pushed prices up further, spare capacity in the UK economy from QE not applying the downward pressure the MPC had hoped for and rising prices encouraging businesses and the public to expect higher inflation in future.
Sentance said: “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.”
Highclere Financial Services partner Alan Lakey says: “The bank will raise interest rates at some point, which will not be good news for people with mortgages but it is the only effective tool to deal with inflation.”