“I do worry that the MPC’s credibility and commitment to the inflation target may already have been eroded by not adjusting policy settings soon enough.” said  Dr  Andrew Sentance in his closing remarks at a pro.manchester members’ lunch on Tuesday 26th April at the Hilton Hotel.

Andrew had  promised an interesting presentation during his speech at a members lunch on Tuesday and he didn’t disappoint. As the first hawk on the Monetary Policy Committee, recent speeches included “Selling England by the Pound” and “Ten reasons why interest rates should rise now”. Andrew Sentance has voted for an interest rate rise from the middle of last year and believes that interest rates should rise by 50 basis points with immediate effect.

Andrew joined the monetary policy committee in 2006 and steps down from the role at the end of May. Inflation is currently running at 4 percent, double the Bank's target, and Sentance explained it had been 3 percent or higher for most of his time on the MPC. In 2009 inflation in the first quarter of 2011 was expected to be just 1%, by the middle of 2010 forecasts had increased to 2% last month inflation CPI basis hit 4%. Not a very inspiring record.

Four themes were outlined during the presentation, the powerful influence of the world economy, with great pressure from developing and the BRIC economies on world commodity prices; the role of sterling in determining UK monetary policy, which has allowed the depreciation of sterling to run too far; the dependence on the output gap amongst certain members of the MPC to bring inflation back to target; and the risk that inflation expectations may rise and the credibility of the Bank of England Monetary Policy is put in jeopardy as a result of inaction on rates.

The MPC faces the task of bringing inflation back to target in the face of continuing global inflationary pressures, with the recent experience of persistent above-target inflation providing an unhelpful backdrop. He said.

“The issues I have raised in today’s speech – the impact of the global economy and the pound, the role of the “output gap” and the importance of expectations and credibility – will continue to be key issues for the MPC over the years ahead, as the Committee continues in its vital role of maintaining monetary stability in the United Kingdom”.

A copy of the speech is available on the Bank of England web site here.

http://www.bankofengland.co.uk/publications/speeches/2011/speech493.pdf

Key issues for UK Monetary Policy Speech given by Andrew Sentance, External member of the Monetary Policy Committee, Bank of England at pro.manchester members’ lunch 26 April 2011