Andrew Sentance calls for a gradual rise in UK interest rates

The Bank of England should start raising interest rates to keep inflation in check according to Andrew Sentance, a member of the Bank’s Monetary Policy Committee.

In a speech he gave in Belfast yesterday, Mr Sentance set out what he called “three powerful arguments” for a gradual rise in interest rates.  Firstly, there are encouraging signs the economy is recovering well from the recession.  Demand for UK businesses, from both home and abroad, has been “recovering for over a year now and look set to continue to grow”, to the point where the economy should be able to withstand a gradual rise in interest rates.

Secondly, higher interest rates will help combat rising inflation and keep it near its 2 per cent target. 

Thirdly, interest rates are extremely low at the moment and have been for a long time – Mr Sentance said he does not believe that “the current economic conditions justify a continuation of this policy.”

He argued that as the economy continues to recover, interest rates need to rise sooner rather than later if we’re to keep inflation under control and avoid the need for more drastic measures in the future.  He said, “The longer we keep interest rates at an exceptionally low level, the greater is the risk that Bank Rate would need to rise sharply in the future – creating a serious setback to business and consumer confidence.”

However, despite these “powerful arguments”, Mr Sentance has been something of a lone voice within the nine-member Monetary Policy Committee (MPC) over the last six months.  The MPC meets each month to set interest rates and at each meeting since June, he has been the only member to vote for a rise in rates (to 0.75 per cent).

He remains steadfast though and concluded his speech by saying that, in the absence of significant changes in the economic outlook, he intends to continue arguing and voting for a rate rise.

The question now is whether any of the other committee members will start to come round to his way of thinking – until they do, the outlook for interest rates remains in the balance.

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