Interest rates may need to rise to curb inflation risks

THE Bank of England’s ultra-loose monetary policy has been a success but Threadneedle Street will have to consider raising interest rates this year if the Monetary Policy Committee (MPC) is to keep inflation risks under control, MPC member Andrew Sentance said in an interview published yesterday.

He said that he was optimistic about the economy following the support provided by loose monetary and fiscal policy but indicated that the MPC might choose to pause its stimulus programme.

However, he warned that it would not be wise for the markets to assume that policy was on hold for the rest of the year or to be too definitive about what to expect.

He said that the prospect of rising inflation could dampen the pace of growth and the MPC would need to think of what consequences this would have for policy.

“There will be quite a lot of spare capacity and slack to take up [as the economy recovers] but that is not the only influence on inflation. There are global influences such as oil and commodity prices and the impact of the exchange rate, which can lead to speed limits for the rate of growth,” he warned.