MNI INTERVIEW: BOE Must Hike In Coming Months-ExMPC's Sentance

The Bank of England will probably need to raise interest rates in coming months but can probably afford to wait in April to see how events pan out, ex-Monetary Policy Committee member Andrew Sentance told MNI.

"I'm very much in the Michael Saunders, Huw Pill camp and leaning towards a modest rise in interest rates -- which to some extent, is a bit of a corrective on the Bank being a little gung-ho cutting rates in recent quarters," Sentance said in an interview, referring to comments by fellow former MPC member Saunders and current chief economist Pill. (See MNI INTERVIEW: Robust Policy Backs BOE Hike - Ex-MPC Saunders ) 

"It is not essential they do it this meeting. But I think they should have it on their agenda, on their radar.”

Sentance said the Bank's messaging had perhaps not been strong enough in recent weeks in underlining the need to get inflation back to the 2% target.

"In the current situation, I think the two courses of action on the policy agenda are to hang in on three-and-three-quarter percent (the current level of Bank Rate) and perhaps talk about that you will be prepared to raise interest rates, but not do it, and until you see a few more data points in the next two or three months."

"Otherwise, you need to take some form of pre-emptive action, either this meeting or the next meeting -- so it's either talking tough language or taking tough action".

WARNS ON WAITING TOO LONG

However, Sentance warned against waiting too long for data confirmation, saying action needed to be taken at some point.

"This idea that we haven't seen all the data, you can really push that argument too far. If you wait until all the complete information has come in, it can be too late," he said.

"Part of the job of monetary policymaking is to take the action that you think will be needed, and then you can always correct or reassess that action further down the track".

Sentance, who served on the Monetary Policy Committee from 2006 to 2011,said it should hike rates by 25 or 50 basis points over coming meetings.

"What you might call a mistake is what happened last time we had this surge in energy costs in 2021/22 where the bank just left it far too long, in my opinion, to do anything". 

However, he conceded that the economy was now in a very different place.

"The economy is in a bit more of a nuanced position this time, which is why I say I'm not too set that they go this meeting, but over a series of two or three meetings, I think they have to come off the fence one way or the other," he said.

MPC SPLIT

Sentance noted that, going into the Iran conflict, the MPC had been “split down the middle,” with Governor Andrew Bailey providing the casting vote in recent meetings.

"The two groups were taking their view almost independently of what was going on in the economy," Sentance said, noting that recent commentary suggested the groups remained in their respective camps.

"There were the four who've been with Huw Pill and Catherine Mann et al who've been saying, ‘we're more worried about inflation and looking at all the indicators, that inflation might be persistent,’ and you can see them reading into this," he said. 

"Then there's the others who basically take all indicators, and they'll probably find enough in there not to support a rise in interest rates. You're going to be left with Andrew Bailey deciding whether to swing one way or the other."