MPC man states case for hike

Andrew Sentance, external member of the Monetary Policy Committee (MPC), said the Bank’s latest inflation report, published yesterday, was too optimistic.

In a speech to the Institute of Economic Affairs, Mr Sentance, who has argued and voted in favour of a rate rise since last summer, said faster and larger rises were needed than the City expected and the MPC was in danger of playing catch-up, which could damage the economic recovery.

The Consumer Prices Index (CPI) rate of inflation hit 4 per cent in January, its highest level in more than two years and double the Government’s 2 per cent target. Last week, the MPC held rates at a record low of 0.5 per cent for the 23rd consecutive month.

The Bank’s quarterly report confirmed that inflation is expected to soar close to 5 per cent before falling to the target in 2012 – but this was based on interest rates rising in line with market expectations, starting as early as the second quarter.

Bank governor Mervyn King and other MPC members have insisted inflation is being driven up by temporary price shocks, such as global commodity prices and the impact of the VAT rise last month, which will fade away.

But Mr Sentance, a former chief economist at British Airways, is unconvinced and reiterated the governor’s comments that “there are significant differences of view on the MPC at present”.

“My judgment is that the upside risks to inflation are understated,” he said.