MNI INTERVIEW: BOE Risks Repeating Pandemic Errors- Sentance
MNI (LONDON) - The Bank of England should pause its rate-cutting cycle as inflation heads higher or risk a repeat of its errors in dealing with the post-pandemic price surge, a former Monetary Policy Committee member told MNI, expressing disappointment that no one on the MPC argued for a hold at the Feb 6 meeting.
"I was really shocked by the complacency of the MPC at the last meeting,” said Andrew Sentence, a rate-setter from 2006 and 2011, noting that this came despite the fact that “they basically produced a forecast that said inflation is going to go up to 3.7%. But that's a quarterly figure, so it could print at 4% in some individual months, and my back of the envelope calculations are that it could even go beyond that.”
Nonetheless, February’s vote saw seven MPC members supporting the 25-basis-point cut to 4.5%, with two calling for 50bp.
"Compare that with The Times shadow Monetary Policy Committee, which I'm on -- we voted five-four for a cut. But there were four very distinguished economists who said, 'No, we shouldn't change interest rates'," Sentance said in an interview. "That's the way I was expecting the MPC to go."
Known in his time on the MPC as a hawk, he stressed that he was not arguing for higher rates and had supported gradual easing.
URGES CAUTION
“But I've been quite keen on cautious and gradual. A figure that has four in front of it for interest rates is probably a safe position at the moment, rather than heading down below 4%," he said, adding that the MPC should remain flexible.
"I think the MPC should be prepared, if we get another big inflation shock, to raise interest rates. But we're now at four and a half percent, I don't think we see too much damage to the economy emanating from keeping interest rates there while we ride out this period of high inflation that we seem to be heading into, and then the MPC can consider how to change rates,” he said.
"Markets, are assuming another two cuts [this year], but if you look at the economic situation, then you wouldn't actually assume that there would need to be any cuts at all.”
Playing down the reacceleration of inflation could prove to be problematic, he said, pointing to the lessons of the post-pandemic inflation surge.
DE JA VU
"The danger is that they're making the same mistake as in 2021, which is saying inflation is going to pick up to 4% and then subside. Well, there's a risk that won't happen, so you need to cover that risk in your interest rate policy, which I don't think is happening," Sentance said.
Wage data in particular have proven resilient, he said.
"I don't quite understand why the wage situation has been so underplayed by the MPC. It's an obvious and major contributor to inflation. Now, perhaps they don't believe the data, and they somehow think it's misleading," he said.
"So the latest view to cut interest rates was around the notion that, well, these wage pressures will disappear -- they've been saying that now for the last couple of years. It hasn't really happened.” (See MNI INTERVIEW: UK Minimum Wage Hike Poses Jobs, Prices Risk )
The adjustment to the post-pandemic inflation shock is still occurring, he added.
"We've still got residual inflation pressures emanating from that period. And not many MPC members are pointing this out. So inflation is probably going to gravitate towards three and a half to 4% and not to towards 2% at the moment, -- and then when you get upward shocks from energy prices it could well be higher than that,” he said.
"Core inflation is 3.7% and CPI excluding only energy is 3.8% -- and that's a very good starting point if you want to try and calculate what's going to happen to CPI. With the Most recent changes in energy prices, I think it's going to push inflation over 4% on the CPI measure.”