–Sentance Says Rates Will Need Tightening Faster Than Mkts Expect
–Says Sterling Has Fallen By More Than Needed For Rebalancing
–Says Sterling Needs To Be A Focus For MPC Policy
–Early Rise In Rates Would Help Appreciate Sterling FX

LONDON (MNI) – Bank of England Monetary Policy Committee member
Andrew Sentance says that the Inflation Report forecasts published
Wednesday were “too optimistic”.

Sentance went on to say that upside risks to inflation are
understated in the report and that monetary policy will probably need to
be tightened faster and by more than markets expect.

Rates Will Need To Rise More Than BOE Conditioning Path Shows

“In my view, this medium-term assessment of the outlook for
inflation is too optimistic. As both the Governor’s letter on Tuesday
and the latest Inflation Report make clear there are significant
differences of view on the MPC at present,” Sentance said

“My judgement is that the upside risks to inflation are understated
in the published fan charts. And monetary policy would most likely need
to be tightened faster and by more than the markets currently expect to
bring inflation back to target,” he added.

Sentance said that the mistake made by the BOE in the recent past
had been to put too great an emphasis on the impact of a large output
gap in bringing down inflation. The BOE had ignored price pressures
arising from the strong recovery of the global economy and the ensuing
rise in commodity and energy prices.

The official said that while the fall in the pound would help the
process of rebalancing the UK economy, sterling had probably dropped by
more than had been required to achieve that and was helping fuel
UK inflation pressures:

“The first line of defence for the UK against global inflationary
pressures is the value of the pound. The value of sterling can help
dampen the impact of imported inflation, as the experience of the
Bundesbank in combating the impact of global inflation in the mid-1970s
showed”.

“But in the wake of the inflationary pressures we are currently
experiencing from the global economy, there must be a concern that we
have let the pound fall much further than this rebalancing requires”.

Indeed, the fall in sterling between 2007-2009 has been the
biggest over such a shortish span of time in 200 years, with the
exception of the early 1930s exit from the Gold Standard.

MPC Needs To Focus On Exchange Rates

Sentance noted that some countries are seeking to appreciate their
exchange rates to act as a ‘windbreak’ against rising global price
pressures, citing Singapore.

In 2008 and 2009, Sentance said, that the MPC could afford to be
relaxed given the weakness of global demand and low commodity prices,
but it could no longer be so relaxed, he said.

“The value of the pound on the foreign exchanges therefore needs to
be one of the key areas of focus for the MPC as we seek to steer
ourselves out of the current phase of high inflation. And one of the
benefits which we might see from a policy of raising interest rates is a
modest appreciation of sterling, which would mitigate the impact of
global inflationary pressures in the short term and help to steer
inflation back to target over the medium term”.

“By raising interest rates sooner rather than later to help offset
global inflationary pressures, the MPC can help reassure the financial
markets and the great British public that we remain true to our
inflation target remit…,” he said.

–London newsroom: 4420 7862 7492; email: ukeditorial@marketnews.com

[TOPICS: M$B$$$,M$$BE$,MSSFX$]