Bank's Sentance warns of risk in rate rise delay

THE Bank of England should raise interest rates sooner rather than later to contain inflation, bank policymaker Andrew Sentance said yesterday.

He said in a newspaper report that a planned rise in VAT sales tax next week to 20 per cent from 17.5 per cent would push inflation above 4 percent.

Mr Sentance, the most hawkish member of the bank's nine-strong Monetary Policy Committee, has repeatedly called for a rise in rates. He was alone in supporting a rise at the committee's December policy meeting, minutes showed.

Rising inflation would force the bank gradually to raise rates from the record low of 0.5 per cent, he said.

"If we delay too long in raising the official interest rate and inflation continues to be a problem we risk making sharper rises in the future," he said.

"In my view, that poses a bigger threat to confidence and to the recovery than starting to raise interest rates gradually now," he added.

British inflation rose to a six-month high of 3.3 per cent in November, the 11th consecutive month it has been at least a percentage point above the bank's two per cent target.

Mr Sentance said higher rates "could benefit the economy."

"It would help to protect savers from the effects of higher inflation by raising the return on their savings deposits," he said.

"It is clearly important that interest rate rises do not derail the recovery," Mr Sentance added.

"That suggests we should aim for a gradual rise in interest rates which gives businesses and individuals time to adjust their finances," he said.

"A gradual rise in the official Bank rate from a record low level of 0.5 per cent should be seen as a positive signal that the economy is beginning to return to normal after the recession," he added