MNI INTERVIEW: Soft GBP No Policy Constraint- Former BOE Hawk

-Former MPC Andrew Sentance Says Inflationary Pressures Are Very Subdued

-Sterling Weakness Only Has Muted Inflation Impact; Doesn't Hamper Easing

By David Robinson

     LONDON (MNI) - With price pressures subdued, the Bank of England can add

stimulus without risk of sparking inflationary fires by weakening sterling,

former Monetary Policy Committee member Andrew Sentance, long a well-known hawk,

told MNI.

     Currency weakness would have little effect with inflation sinking in the

coronavirus-hit world, said Sentence, who during his time on the MPC highlighted

the risk of leaving policy loose, weakening sterling and prompting an overshoot

of the inflation target.

     "A currency decline is an accelerant for inflationary pressures which are

building more generally in the economy. It does not act independently of the

broader macro environment," Sentance, senior adviser to Cambridge Econometrics,

said.

     "Wage growth, domestic demand, capacity utilisation, services inflation,

commodity price rises and other indicators of inflationary pressure are

currently very subdued. So weakness of the pound will have a muted inflationary

impact because so many other factors are operating in the opposite direction,"

he said.

     --NIESR WARNING

     National Institute of Economic and Social Research director Jagjit Chadha

told MNI in a recent interview that the potential for sterling weakness may

impose constraints on monetary easing,

     Bank officials, on both the financial stability and monetary policy sides,

have also explored the currency risks in light of the UK's large and persistent

current account deficits.

     But on a trade-weighted basis, sterling has held pretty steady over the

past month after plunging to 73.2 on its ERI on March 25 as gilts were sold off

and investors fled to the dollar, It rebounded when the BOE relaunched bulk gilt

purchases and it is little changed from 78.1 level it hit at the start of April.

     In its Monetary Policy Report published Thursday the MPC said that CPI was

likely to fall below 1% in the next few months, largely as a result of falls in

energy prices, which should facilitate adding stimulus. The Bank's latest

scenarios see inflation holding below target until late on its three-year

projections.

     "When the inflationary fires are damped down, pouring accelerant into the

mix has little effect," said Sentence. "When the inflationary situation is more

unstable, a currency decline can be a powerful force driving an inflationary

cycle."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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