MPC member cautions on deflation risk

City A.M. Reporter
THE Bank of England (BoE) may find it hard to keep inflation on target as long as import and services prices keep rising strongly, Monetary Policy Committee member Andrew Sentance said yesterday.

In a speech in London, Sentance said the economy was facing opposing pressures which the BoE would have to consider when it updated its forecasts for next month’s Inflation Report.

“If the headwinds from the financial crisis and the consolidation of public finances dominate the outlook, the balance of risks to inflation are likely to be to the downside,” he said at a conference of the British Property Federation.

However, there were grounds for optimism about growth because sterling was at a more competitive level than during the last recovery in the mid-1990s and manufacturers were more optimistic in business surveys, he noted.

“If the tailwind from the global economy, a competitive exchange rate and a recovery in confidence are felt more strongly, then the margin of spare capacity could be eroded more quickly. In that scenario, there will be more upward pressure on inflation,” Sentance said.

Gilt futures edged lower after the comments as markets viewed Sentance’s remarks as suggesting that the tailwinds were stronger than the headwinds, and that the BoE needed to be vigilant towards growing inflationary risks.

“It doesn’t take a rocket scientist to guess which of the two outcomes this MPC member favours,” said Alan Clarke economist at BNP Paribas.