Economist warns of persistent inflation problem

Andrew Sentance, who stepped down in May, also questioned the judgment of the Governor, Sir Mervyn King, over his comments that the current financial crisis could be the most serious ever seen.

In an interview during a visit to Leeds, Dr Sentance blamed the slowdown of economic growth in the UK on the wider global slowdown and the impact of high inflation on consumers. Consumer price inflation has hit 5.2 per cent.

Dr Sentance told the Yorkshire Post: “The fact that we have got slow growth accompanied by high inflation makes it a much more difficult issue to deal with for the MPC.

“I’m not actually in favour of their expansion of quantitative easing programme because I don’t think it’s going to be particularly effective and I think it’s sending the wrong signal about the Bank’s commitment to its inflation target.

“We have already had three years of pretty high inflation. In my view, this is potentially a more persistent problem.”

He said: “The conditions that existed [in 2009] that probably made QE effective I don’t think are so supportive now.

“I think we’ve reached the point when we shouldn’t be trying to stimulate the economy further and we should be allowing the economy to adjust to the situation that we are in post the financial crisis.”

Minutes from the MPC’s last meeting showed that policymakers voted unanimously to restart gilt purchases and even considered injecting more than the agreed £75 bn.

Following the meeting, Sir Mervyn said: “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever.”

Asked if he agreed with the Governor, Dr Sentance said: “I think there’s a great danger in that statement being misinterpreted.

“I think I know what he means by it. We haven’t seen such serious problems in the banking sector before.

“But when you talk about the worst financial crisis ever many people interpret that as being the worst economic crisis ever and I don’t think that’s the case.

“In some respects the recession has not been as severe in terms of unemployment for example as previous recessions we have had in the ’80s and ’90s and certainly in terms of the broader economy we are not seeing the levels of stress we saw in the ’30s.

“I’m not sure I think it helps to talk in those terms.”

Dr Sentance was in Yorkshire to take part in a Marketing Leeds panel debate about the national and international economy and how the UK can best respond to the challenges.

He told the audience of business leaders at the Northern Ballet theatre that “structurally, the UK business community is in reasonably good shape”.

He said the “missing ingredient” to encourage growth is a clear supply-side agenda and urged the Chancellor George Osborne to spell one out in his autumn statement. Supporters of supply-side theory believe that cutting taxes and regulation increase private sector investment.

Dennis Turner, chief economist at HSBC and fellow panellist, told the audience: “If we create that supply-side environment it’s a win for domestic business.”

Dr Sentance, who served on the MPC from 2006, said he expected the economic recovery to continue, but added “we can’t expect economic recoveries to be linear and to proceed at the same pace”.

He said businesses resuming investment programmes would be “the most promising source of growth”.

Dr Sentance added: “There’s a limit to how long you can keep putting off replacement of necessary equipment and the various mothballed projects will come back into the business planning environment as we go through to next year.

“But that does depend on the resolution of some of these international uncertainties around the euro area.”

He said: “We need to see an early resolution of the problems in the euro area.

“It’s already been postponed too long to have a decisive impact on the financial markets and some of the nervousness we have seen in the financial markets over the last couple of months reflects the concerns that the euro area problems are not going to be resolved.

“I do think it’s in the interest of European policymakers to grasp the nettle now and hopefully out of the European summit that’s coming up and the G20 meeting we will see a concrete plan emerging which will be credible for the financial markets.”

More QE could be on the cards

Bank of England policymakers considered injecting more stimulus into the economy than the £75bn of quantitative easing that they voted for at this month’s rate meeting, boosting prospects for additional future asset purchases.

The decision earlier this month surprised markets in both its scale and timing, and economists said that the details of policymakers’ discussions revealed in Wednesday’s minutes suggested more QE was likely if the economy worsens.

They showed that policymakers considered injecting between £50bn and £100bn at the meeting, due to a sharp deterioration in growth prospects.