MercoPress. South Atlantic News Agency

Bank of England may need to hike interest rates to combat inflation, warns banker

Andrew Sentence has been on the MPC since 2006

The Bank of England may need to hike interest rates soon as inflation has remained far stickier than expected, rate-setter Andrew Sentance warned in The Sunday Times.

Sentance has been on the monetary policy committee (MPC) since 2006 and has been one of a small number of members suggesting the Bank must lift rates as inflation continues to overshoot forecasts.

He told the paper that spare capacity had done little to stymie price growth and pointed out a recent survey from the Confederation of British Industry showed spare capacity is back to pre-crisis average levels.

Spare capacity is the supposed difference between output and the economy’s potential but its existence and impact has been the subject of heated debate – especially since hopes it would suppress prices have come to nothing

He said: “The recovery in the economy and the resilience of inflation highlight the issue of how long such an expansionary policy will remain appropriate”.

In April, UK inflation climbed to 3.7% - well ahead of the target level and above where the Bank of England had forecast it would peak. It is also 3% higher than the Bank had been forecasting a year ago.

The Bank has repeatedly said inflation will peak in the first half of the year and will fall back below the 2% target in the second half but Sentance said he expects some 'interesting debates' at MPC meetings over the coming months - suggesting he thinks things may turn out very differently.

The bank is under pressure from business leaders and the government not to lift rates until the recovery is sustainable - especially given the massive government spending cuts on the horizon and still rising unemployment could lead to falling consumer demand.

Rising rates would mean a squeeze on household budgets even as the new government looks to raise revenues and spend less.