LONDON (Reuters) - The factors pushing up British inflation cannot simply be dismissed as “one off” influences and the Bank of England risks losing credibility if it fails to respond, BoE policymaker Andrew Sentance said on Monday.
Sentance, who broke ranks with other Monetary Policy Committee members to call for higher interest rates last summer, said inflation risked becoming entrenched and a gradual tightening of policy now could prevent a more aggressive move later on.
He had little time for those who relied on models of the domestic output gap, saying the open nature of Britain’s economy meant monetary policy needed to be set in a global context.
“It would be a mistake to label all the global factors affecting inflation as one-off short-term disturbances and to see the medium-term influences purely in terms of domestic factors,” Sentance said.
UK interest rates have stood at a record low 0.5 percent since March 2009, but pressure for a rate rise has mounted in recent weeks. Inflation has been above the BoE’s 2 percent target for over a year and looks set to hit 4 percent early this year.
The need for action had become more pressing, Sentance said.
“As I have argued in recent months, if we do not start to raise UK interest rates gradually soon, we risk having to do so more aggressively in the future -- which could create a big shock to business and consumer confidence further down the track.
“The lack of a substantive policy response to persistent above-target inflation also enhances the risk of a loss of credibility in the inflation target itself and a loss of belief in the commitment of the MPC to achieving it,” he added.
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