Monday, February 28, 2011

Andy Sentance explains why rates have to rise

Andy Sentance lays out the case for a rate rise in a recent speech entitled - Ten good reasons to tighten:
The MPC is accountable through its mandate to keep consumer price inflation at 2%. The mandate acknowledges that fluctuations will take place due to factors outside the MPC’s control. However, such factors causing deviations of inflation from target might be expected to be temporary rather than persistent. That has not been our experience, though.

Inflation has been above target for most of the time I have been on the MPC and some of the upward deviations have been quite significant. This creates a much stronger platform for tightening monetary policy than if we had experienced simply a “one-off blip” in inflation. The average CPI inflation rate while I have been on the MPC – since October 2006 – has been around 3% and over the past three years it has averaged 3.5%. In January it was 4.0%. In addition, CPI inflation is expected to rise higher in the short-term before falling back.

Indeed, since 2009, when the MPC put in place the current policy settings, inflation has persistently run ahead of the official forecasts set out in the Bank of England Inflation Report.

It is a must-read speech....

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