Sentance proposes bank rate hike to offset false confidence

Andrew Sentance of the Bank of England advocated gradually raising interest rates on Tuesday in order to curb any destabilisation brought about by false confidence that the worst was over.

Sentance made it clear to say that any tightening of monetary policy should be a gradual affair rather than a sudden one, but the 51 year old member of the BoE’s Monetary Policy Committee does indeed believe that raising interest rates will be beneficial for continuing economic recovery.

Sentance said that the weakness of the pound had been one factor that fed into a recent inflation spike. Moreover there were suspicions that an exceedingly loose monetary policy, coupled with the expectation that rates would hold steady at a record low of one half of one per cent for the foreseeable future, had been contributing to that.

The fear that both inflation and the downside risks to the economy a year ago that led to the BoE’s drastic policy loosening has since evaporated, especially in light of some recent official findings: the inflation rate declined to 3.2 percent last month.  This easing was to be expected, economists say, though the rate is indeed well above the two per cent goal that the BoE set. The BoE does expect inflation to continue to subside, however.

Economists also noted that the benefits of inflation can be reaped by small business bank account owners who are currently repaying fixed-rate business loans, as a rise in inflation will lead to a reduction to the “real” interest rate of their loans.

Sentance, called an “inflation hawk” by some, was the only Committee member since August 2008 to vote for a rate hike.  He stated that while he’s in favor of a tightening of monetary policy to avoid runaway inflation,  he is not yet concerned that any major or serious risks of such increases exist.  He continued on to state that the fears of risking a “double-dip” recession are not the same as an uneven economic recovery.

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