BoE risks blow to credibility over rate stance, warns Sentance – 1944

14th October 2010

In a speech to the British American Business Council , Sentance, a member of the BoE's Monetary Policy Committee (MPC), again argued for the Bank to begin a ‘gradual adjustment of monetary policy". He believes the improvement in the UK economy seen over the last year and persist above – target inflation means it is time to begin withdrawing the "very substantial" level of monetary stimulus that has already been provided to the economy.


Sentance fears a continuation of current policy will result in inflation becoming embedded, forcing sharper and faster rises in rates. He warns: ""If we continue to experience above-target inflation, while the MPC sets policy to head off the opposite risk – of deflation – confidence in the inflation target and the credibility of the MPC risk being eroded….the longer the period of above-target inflation goes on without any policy response, the greater this risk becomes."


He worries that confidence in policymakers charged with maintaining low and stable inflation could have a knock-on effect on inflation expectations across financial markets, among the business community and the public.


The Bank appears to already have lost its credentials on inflation among some public members, with Daily Telegraph reader morgan complaining: "Credibility? What a joke when their inflation target index (CPI) can hide a 6% rise in the cost of essentials by some spurious, incredible and frankly unbelievable 30% fall in the cost of air travel.


Morgan adds: "Most people know real inflation in the UK is AT LEAST 5-10%  The MPC, the CPI all just propaganda to justify a perverse and unfair monetary policy."


Sentance's position as the lone hawk on the MPC contrast sharply with that of fellow member Adam Posen who has been calling for yet more stimulus to be provided to the economy on worries about deflation and significantly below-target inflation 12-24 months out.


While Sentance believes the economy is now strong enough to cope with gradual tightening of monetary policy, Posen has been raising the spectre of low growth and high unemployment, something Japan had to contend with throughout the 1990s.


Azad Zangana, European economist at Schroders, says Sentance's latest salvo on rate policy should be seen as a warning against reading too much into single weak data points both in the US and the UK.


Zangana says: "Sentance is clearly confident the global recovery is underway, but is particularly concerned that there is less spare capacity in the UK economy, which means that deflationary pressure may be far weaker than the majority of the MPC believe.


"Though he expects raising interest rates will cause some pain for borrowers, he also believes that many savers who rely on interest payments for their incomes, would benefit, and potentially boost confidence in the recovery."


Given Sentance's recent votes – he has been voting for tighter policy since June – the tone of his latest "confident" comments comes as little surprise to Zangana.


Zangana adds: "Sentance has so far failed to persuade any other MPC member to join him in voting for tighter policy and our sense is that Adam Posen may have similarly been unsuccessful in attracting supporters. We continue to expect next-week's MPC minutes to show a three-way split at the October meeting, and suspect that this pattern may be evident for some time. "


In a recent interview with MindfulMoney, Zangana argued that further loosening of policy via quantitative easing could not be justified both in terms of how the BoE went about calculating how much QE was needed originally and on the basis of the UK's economic performance since that injection.

15 thoughts on “BoE risks blow to credibility over rate stance, warns Sentance – 1944”

  1. Anonymous says:

    I think stagflation is the best the UK can hope for.  Slumpflation (falling real GDP + inflation) is the danger.

  2. Anonymous says:

    One day, far into the future, the BoE will stop playing games and raise interest rates to at least 2%. That will have an impact on the house market, and it will not be positive.

  3. kdh says:

    You give the impression that hgh house prices are a good thing.  Surely, part of the problem with the UK (and US/Spain) has been the increase in house prices to unaffordable levels, and then Joe Public taking this ‘wealth’ and spending it.  The younger generations get into debt to fund the lifestyleof those who have recently retired, who bought their houses for about 1/2 the amount (in real-terms).

    Anything which reduces this to a more affordable level and stops this transfer of wealth from youg to old can only be a good thing.

    1. Anonymous says:

      Hi kdh and welcome to my part of the blogosphere.

      With today’s update I was explaining why I think that house prices are on a downward trajectory. Let me add my opinion which is on my past updates that I feel that we need to deflate our housing bubble but we need to do so at a gradual pace.

      I have great fears for the state of our banks and feel they will not be able to withstand a housing rout and also the wider economy is currently fragile and would be further weakened by it. In my opinion the Bank of England move makes a rout more likely which would do harm to our economy.

      The irony is that a hamfisted withdrawal of a stimulus measure is as I pointed out contributing to conditions which make the MPC think of new stimulus moves..

  4. James says:

    We seem to be entering the home straight in terms of several different crises at once and it is becoming clearer by the day that:
    1. We have collectively been living beyond our means;
    2. We now have a huge debt burden, which we are just about keeping afloat through crazy pain deferment schemes (inflating away debt, QE, QE2, Greek bailouts, bank bailouts, absurd stress tests etc etc);
    3. people are gradually realising that this is not sustainable and so it is becoming a bun fight between the players as to who should take the losses (public sector pensions or taxpayers, banks or taxpayers, greeks or germans, old people or young people).
    In my humble opinion, carving up an ever smaller cake is going to cause great friction ahead.

  5. Jimbob says:


    You have mentioned many times you think our economy is into stagflation. Am I correct that GDP is adjusted for inflation, and if so with inflation at 5%ish, we could be considered to be ‘growing’ at 2-3% more than previously? Would there be any benefit in this? 

    1. Anonymous says:

      Hi Jim

      GDP figures are split into real ones and nominal ones. The real ones are adjusted for inflation using a number called an implied deflator that is used as an inflation measure. I mention it from time to time usually around GDP updates for obvious reasons!

      Nominal GDP has been running hot as you imply and yes it includes inflation albeit at the implied deflator rate which is lower than CPI or RPI at the moment.The government benefits from this to the extent that there are instruments or vehicles which are not indexed to inflation which are

      1.Level of non-indexed governement debt which is about 75/80% of our total.

      2.Some tax thresholds are not always indexed to inflation.

      3. Some taxes such as VAT and excise duties are levied on nominal spending rather than real spending. Accordingly as we cannot subtract for inflation when we buy things then revenue from these rises with inflation as much as they do from economic growth.

      There are other factors but I hope you have a flavour of the main elements. You could argue that some of the gains are lost as time passes because of the effect on index-linked public-sector pensions.

  6. James says:

    The surest sign yet that the end is approaching is that the BBC (yes, really, the BBC) has two articles today (by Gavin hewitt and Stephanie Flanders), both of which openly discussing the break up of the euro zone. For what is, to all intents and purposes, the mouthpiece of Euro propaganda for the last twenty years to be discussing the end game seem pretty ominous to me.

  7. Anonymous says:

    Your description of the withdrawal of SLS sounds more like the medical condition of withdrawal symptoms.    The application of “cold turkey” ideas is seldom succesful, but the Bank is applying a definite timed withdrawal to which the patient (victim) will have to acclimatise.  I take your objection is to the timing or speed of this withdrawal not to the fact that it has to be withdrawn?

    1. Anonymous says:

      Hi mcgrath

      I am an advocate of exit strategies for central banks and argue for a lot of changes by the Bank of England! However this one has been hamfisted in my view and could turn a (necessary) fall in house prices into a more of a rout. When it was started matters such as the Euro zone problems were known and were always likely in themselves to cause more banking problems…

      The irony that they are now thinking of a longer-term intervention as in more QE would mean they are piling policy error on policy error.

  8. Anonymous says:

    As far as I can see there are no reasons to be cheerful about the UK housing market. A further fall in prices will plunge more into negative equity trapped in their homes unable to sell. A rise would leave the hope of buying a property for first time buyers even further out of their reach.
    We have painted ourselves into a corner.

  9. Anonymous says:

    Hi Mrs Cake and welcome to my blog.

    I sometimes use song titles as a message and I am reminded by your comment of “Damned if I do, damned if I don’t” by the Alan Parsons Project!

    As I explained in my article I expect house price falls and I will add now that I think that we need them as a deflation of our housing bubble is part of a way out of the mess that we are in. My fear is that the SLS withdrawal will contribute to an accelerating fall which could become a rout which would impact on the wider economy like 1990/1.

  10. Me says:

    You neglect to mention that this is as much about information management as anything else.
    The Rightmove index, for example, only takes initial asking prices into account and has for years been gamed by the industry. So, for example, a house marketed at 500k and later dropped to 400k does NOT appear as a drop on the index.
    Thus, houses are marketed way above value and gradually reduced in price. This way, the public can be suckered into overpaying and have their delusions of property millionaire-dom maintained.
    Inflated house prices almost exclusively caused the current crisis.
    There is nothing to be gained from keeping bankrupt owners in overpriced houses.
    Lets stop fighting the problem and just begin to accept the solution – house prices must fall and many, many people (and banks) will go under.
    Until then, the economy will stagger along from bailout to bailout ad infinatum.

  11. Mac says:

    What made me do a double take when I listened to the
    measures introduced by the last government to support banking and especially the
    near nationalisations was the fact that if the housing market did go through a
    necessary correction then it would be the national government who would be in fact
    making people homeless by normal commercial repossessions.

    I don’t think any government would want to be accused of that
    so expect more or extended help for over extended homeowners. 

    I also agree a lot of the ‘wealth’ has been taken out of the
    housing market by people cashing in on their main chance, the problem is a lot
    of it ended up outside the UK.       

  12. payday loans says:

    Mortgage borrowers are moving away from fixed-rate deals. Some 60 per cent took out a fixed-rate product in July, down from 62 per cent in June. This trend probably reflects an increasing awareness that interest rates are likely to remain low for an extended period. However, the number of loans to first-time buyers fell to 18,200 from 18,500 the previous month. The lending criteria for new mortgage borrowers also remain strict. The average deposit required remained at 20 per cent in July. The multiple of income that first-time buyers can borrow is also shrinking. They typically took out a loan worth 3.18 times their income in July, down from 3.22 in June.

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