At an Institute of Economic Affairs conference today he said he thinks inflationary pressure is greater than suggested by the MPC’ s latest Inflation Report.
Sentance said the importance of the ‘output gap’ has been overstated and too little weight has been put on the upward pressure from the global environment and the exchange rate.
During both the recessions of the early 1980s and early 1990s, the unemployment rate rose to over 10% but Sentence said the current 8% rate has peaked so is likely to fall as the recovery gets going. This is one reason “pay pressures” are starting to build, he argued.
Domestic demand in the UK economy has bounced back strongly, he said, following the recession and argues that the ‘pricing climate’ is more complicated than a simple view based on measure of the ‘output gap’ would suggest.
Meanwhile, the MPC could hike rates from 0.50% to 0.75% in May, said IHS Global Insight chief European and UK economist, Howard Archer, but said he thinks the Bank of England will hold rates until later this year.
“This reflects our belief that growth will slow appreciably over the next few months and that a soft labour market will prevent higher inflation expectations feeding through to lift wage growth significantly,” he said.
“There are serious concerns over the outlook for consumer spending, which we believe warrants caution on hiking interest rates now. Even a small hike in interest rates risks hitting consumers’ psychology hard at a time when confidence is low and falling.”
He added even if interest rates do rise sooner rather than later, they are likely to move “relatively gradually and stay very low” compared to past norms.
Archer added he expects interest rates to rise slowly to 2% by the end of 2012.
