FOR seven months Andrew Sentance stood alone, the only Bank of England rate-setter brave enough to call out for a gradual rise in rates.
Yet in January he was finally joined by one of his eight colleagues, Martin Weale, in his appeal for a gradual tightening in the central bank’s rates.
“I don’t want to comment on the views of individual members,” he told us yesterday from his majestic Bank of England office overlooking the Royal Exchange, “but as a general observation, the last two sets of minutes have reflected a growing concern about inflationary pressures.”
Last week the pair’s stance faced scrutiny when preliminary figures signalled a major setback for the economy at the end of 2010. Some said this proved monetary policy should remain ultra-accomodative.
But Sentance remains unfazed.
“They did put a health warning around the data, I think people should pay attention to this,” he said, referring to the incomplete nature of the Office for National Statistics’ provisional figures.
“And one thing we can pretty clearly say about the fourth quarter data is that it’s heavily snow affected. And we need to be prepared to look through fluctuations in GDP growth when we’re recovering from recessions; growth figures are never linear and smooth in recoveries,” he added.
Whether or not Sentance can convince more of the monetary policy committee (MPC) to vote for a rate rise this month, his one man inflation-fighting campaign comes to an end in May, at least from within the Bank’s hallowed halls.
The former Confederation of British Industry (CBI) economist is departing the MPC, which he first joined in October 2006 (he marked his entrance back then with an instant call for an interest rate rise; once a hawk, always a hawk).
Sentance would prefer his successor, like him, to have a background in business. “I’ve certainly drawn on my business experience in fulfilling my role,” he said, referring to his time at British Airways. “That’s very important for the MPC, to have input that can directly draw on business – I’ve found it particularly helpful. After all, the processes that we’re discussing are very much about how businesses operate in the real world.”
And Sentance echoed the calls of business groups for the government to do more to allow private sector growth.
“At a time when we’re looking for the private sector to pull the economy forward, it’s important for government policy to be seeking to reinforce that,” he said, citing the CBI’s call for a positive growth strategy from the coalition government.
Emphasising the need to combat inflation, Sentance empathised with the effects on businesses and everyday consumers. “Those are the communities who suffer from high inflation,” he said.
The consensus against inflation is still very much alive in the commercial world, he insisted. “I don’t see there’s any lack of concern [about inflation] because we’ve seen a lot of media stories about it.”
“The things that have really disrupted the UK economy in the past have been letting that inflation genie get out of the bottle, and if expectations do rise and people do start to expect higher inflation, it is a hard and painful job of reasserting stability,” he warned.
The Bank enjoys a “hard won stock of credibility” from years of keeping inflation low and on target, Sentance said, while stressing that it must not squander this reputation by allowing inflation to threaten the economy again.
“I’m concerned from my time on the MPC that we make sure that we are keeping that stock of credibility topped up by acting consistently with our target. I think the longer the situation goes on where we’re not prepared to take any monetary policy action against rising inflation, the bigger the threat to credibility becomes,” he said. “Over a period of time if the MPC appears not to act when there are things it could do to at least moderate the inflationary pressures then that [loss of credibility] is a risk.”
“The fact is that measures of inflation expectations have moved upwards, the direction of travel of these measures is pretty clear and that’s something the MPC should look at very carefully, and be concerned about,” he said.
And the Bank must bear in mind the strength of the global recovery, Sentance warned. “We’re a very international economy, a lot of our inflationary processes are also influenced by the international economy so we need to take that into account in setting UK interest rates.”
“What is happening is we’re having these external and cost pressures on inflation but the demand climate for the UK is allowing them to come through to the consumer, and I think the worry is the beginning of a change in the pricing climate that we’ve seen in the UK, away from a pricing climate based on low and stable inflation.”
“All the big shocks that the MPC has had to deal with in its life have been driven by the international economy,” he said, listing the Asian crisis and bursting of the dotcom bubble as two examples. “We should be reflecting on that experience, and taking the current external factors seriously.”
But what of claims that inflation is merely caused by temporary and external effects – commodity prices, the rise in VAT? Sentance is unconvinced.
“I don’t think you can compartmentalise inflation in that way,” he responded.
“In the current climate we’ve seen the demand situation in the UK economy has improved very considerably. The growth of nominal demand is almost the strongest that we’ve seen even if we compare to the 1990s and 2000s before the crisis.”
Nominal domestic demand – spending by UK consumers, businesses and government, in total money terms – was up 6.8 per cent year-on-year in the third quarter of 2010, Sentance said.
“One of the indicators that worries me most is the price expectations measure in the CBI’s industrial trends survey, which jumped between October and January – the biggest jump they’ve seen in that survey since the late 1960s.”
And Sentance rejects the claim that spending cuts will halt the recovery, citing the fiscal consolidation of the 1990s as a precedent. “There was a big fall in government spending as a percentage of GDP and there were some selective tax rises as we’re now seeing – and the economy grew through that period,” he said.
Sentance remains as willing as ever to put his neck on the line: “I still believe the time to have started raising rates was the middle of last year.” His colleagues on the MPC didn’t agree, but it seems inevitable they will be forced to raise rates at some point this year. Let us hope this won’t turn out to be a case of closing the stable doors after the horses have bolted.
CV | ANDREW SENTANCE
Work: Former senior economist at the Confederation of British Industry (CBI). At London Business School, became director of the centre for economic forecasting. In 1998 joined British Airways, where he became chief economist and head of environmental affairs.
Education: Educated at Eltham College; Clare College, Cambridge University; and the London School of Economics, where he gained his PhD. He holds a visiting professorship at Royal Holloway, University of London and is a Fellow and former chairman of the Society of Business Economists.
Family: Married, two children.