Interest rates must rise now says former MPC member

THE Bank of England should start raising interest rates immediately to help the economy adapt to the aftermath of the financial crisis, a former policymaker says.

Andrew Sentance claims the Bank of Englands stance may be damaging the UK economy. Picture: Getty

Andrew Sentance, who was an external member of the bank’s monetary policy committee (MPC) until 2011, told Scotland on Sunday that economic stimulus may be damaging the economy by pushing up asset prices and keeping firms reliant on cheap money.

His views contrast with current thinking in the Bank of England, which has been at pains to make clear that it intends to keep interest rates low for as long as possible in order to support the still delicate recovery.

MPC members including Bank governor Mark Carney went on a charm offensive last week after a surprise plunge in the jobless rate rendered their forward guidance out of date. Although a jobless rate approaching 7 per cent had previously been touted as a cue to consider monetary tightening, they pointed out that inflation is falling and wage growth remains poor.

Sentance’s comments come as economists are predicting another strong quarter of GDP growth, with official figures for the final three months of 2013 due on Tuesday.

The momentum of the previous two quarters is expected to be maintained, with output growing by a little under 1 per cent.

But Sentance, now a senior economic adviser to accountancy firm PwC, agrees with his former Bank of England colleagues that the recovery is still fragile and growth is weak by pre-recession standards.

He said western economies are in a prolonged transitional phase, having left behind the strong growth before 2007 when financial deregulation, cheaper imports from industrialising emerging markets and a post-1980s confidence in the system drove output higher.

“All those three things have basically gone away – we are not in this world of easy money, cheap imports and confidence any more,” he said.

“The reason growth has picked up is because we had a squeeze from inflation and the euro crisis that has subsided, but the underlying growth rate of the UK and other western economies is not that strong. We see that from weak productivity growth and business investment that is not picking up strongly.”

Current MPC members have also flagged concerns over the underlying strength of the recovery, but have signalled that they support growth by finding new ways to keep interest rates low and issuing a new set of forward guidance rules.

But Sentance said that instead of propping up the remnants of the old system with cheap money, policymakers should be focusing on creating the right business conditions for new drivers to emerge. A major investment in creating a low carbon economy could be such a catalyst, for example.

He said: “I think monetary stimulus was there to deal with the situation we were in in 2008-9.

“If we are looking for what’s going to drive growth in the future, it’s more about the economy adapting to the changed world we are in, and monetary stimulus can hold back that process – it causes the economy to rely too much on that level of support. It pushes up house prices and asset values on the stock market but it’s not necessarily creating a sustainable basis for growth.

“I think we should be trying to wean the economy off this monetary stimulus, in a gradual way. We need to get used to the idea that interest rates will gradually rise, even if they don’t get back to levels seen before 2008.”