The Bank of England (BoE) needs to raise its interest rates by 3 per cent if it wants to stop inflation, according to former UK rate-setter Andrew Sentance.
Previously an external member of the BoE’s monetary policy committee, Sentance argued that interest rates need to be increased fast to contain inflationary pressures, which last month reached an all time peak of 9 per cent.
“If I were a member of the MPC now, I would be looking to raise the official UK interest rate to at least 2 per cent by the autumn and to about 3 per cent by next spring,” Sentance wrote in the Times.
“This would still be relatively mild monetary policy action, given the prospect of 10 per cent inflation later this year.
“But it would be a much more appropriate response to current inflation risks than the MPC’s recent approach of gingerly and unconvincingly edging up UK interest rates.”
According to the former rate-setter, the BoE was too slow when last month it set its main rate to 1 per cent – the highest since 2011 – and that led to a “serious mismatch” between interest and inflation.
“It is often argued that higher interest rates would not help the economy when a large part of inflation is being generated by high prices for energy and food, but as the German Bundesbank demonstrated in the 1970s, a robust monetary policy response can also help to counter imported inflation by supporting the value of the currency,” he added.