Rate hawk who rocked the bank

Once a lone voice for a rise in the cost of borrowing, Andrew Sentance leaves the monetary policy committee with a mixture of pride and frustration

David Smith Published: 22 May 2011 (Sunday Times)

Mervyn King and Led Zeppelin fan Andrew Sentance — as they might have been (Ebet Roberts)

For Andrew Sentance, outgoing “hawk” on the Bank of England’s monetary policy committee, there are a few formalities to go through before he departs.

There will be a reception hosted by Mervyn King, the Bank’s governor, at which he will be presented with a bound copy of the minutes of all the MPC meetings he attended over five years.

Then he has three months off to ponder his future — a planned return to the private sector — and brush up on his guitar.

He is likely to remain the only MPC member to give his speeches the titles of 1970s’ albums by Genesis (Selling England by the Pound) and Led Zeppelin (The Song Remains the Same).

He leaves with a sense of pride over what the committee did during his time as a member, frustration that his push for higher interest rates came to nothing, and a warning that the Bank faces its most challenging period.

“There were three big challenges we faced,” he said. “The first was in 2008 when we had the big spike in inflation and I think the MPC responded broadly correctly there.

“Then we had the financial crisis and the recession, when we cut interest rates aggressively, along with quantitative easing.” That, he said, halted the economy’s slide and laid the groundwork for recovery.

In the third period, however, he parted company from most of his colleagues on the MPC. For months he was a lone voice pushing for a rate rise, which he began doing last June. Lately he has been joined by Martin Weale, another external MPC member, and Spencer Dale, the Bank’s chief economist.

But with Sentance leaving and recent growth figures disappointing, the markets do not expect a rate increase until the end of the year, despite inflation at 4.5% and officially predicted to climb to 5%.

“When I look back on the past year it is this element of unfinished business,” he said. “We had to exit from those very low interest rates and I’ve made clear we should have started that process much earlier. We haven’t started yet.

“I don’t feel I could have done much more to get the case across. I’ve put the case strongly and that’s the right thing for an external member of the committee to do.”

When the MPC slashed the base rate to 0.5% in March 2009 — the lowest in the Bank’s 317 years of existence — Sentance fully expected it to be a temporary measure. He confesses to being astonished that the rate is still so low more than two years later.

“It certainly was my sense that when the economy began to recover ... some of that policy relaxation would have had to be reversed sooner rather than later,” he said. “This is the longest period of unchanged rates since the early 1950s.”

He got used to being isolated within the Bank, particularly in the second half of last year, and of being accused of being an inflation-obsessive.

David Blanchflower, the abrasive former member of the MPC, was particularly harsh, calling him “Death” Sentance and “the MPC’s resident clown”.

Though the attacks may have hurt, he is unmoved. He thinks he was acting to protect the Bank’s credibility, which is at risk, and that the longer the MPC tolerates high inflation, the greater that risk. His worry is that the Bank will not respond until it is too late.

“If you wait until the risks have crystallised, pushing up inflation expectations, or until people seriously question the Bank’s credibility, that would be too late. The art of successful central banking is to act ahead on a precautionary basis.”

For outside observers, the splits on the MPC confirm the old observation that when you put a group of economists in a room you are bound to get wildly varying opinions.

While Sentance voted again for an immediate increase in Bank rate to 1% this month, another MPC member, Adam Posen, wants another £50 billion of quantitative easing.

For Sentance, 52, these differences are not minor. They go to a fundamental point about how the economy works. He is blunt in his belief that the Bank is getting it wrong because it has an outdated view of the situation.

“A way of looking at the economy grew up in the first decade of the monetary policy committee which is quite heavily rooted in the output-gap view of the world, which is the notion that it is the degree of spare capacity that affects inflation,” he said.

“The danger is that, instead of looking at the UK economy as it is, which is a relatively open economy exposed to international factors, we look at it as some sort of cut-down version of the US economy, which is much more closed. That framework needs to adapt to the way the economy has changed.”

Britain has an open economy that is buffeted by these international factors, and always will be. In the so-called Nice (non-inflationary, consistently expansionary) decade they were favourable. Now they are unlikely to be, he said.

King has argued that if you strip out Vat, and commodity and import prices, inflation remains under control, but Sentance has little time for that stance.

“It’s quite important we don’t go down this route of stripping things out of the inflation index. If you go down this route of saying that, if we strip out all these things, inflation is under control, that itself begins to lose credibility with the general public,” he said.

“The pricing climate we have in the UK has allowed companies to pass through price increases in a way we would not want to see in the medium term.” The pound, he said, has fallen further than it needed to and would have bounced back if not for the Bank’s dovishness.

 

Inflation to stay high: MPC hawk

As he prepares to depart from the MPC Andrew Sentance's comments on inflation are in stark contrast to those of the governor

David Smith, Economics Editor Published: 22 May 2011 (Sunday Times)

Inflation is likely to stay high for a “prolonged period”, according to an outgoing member of the Bank of England’s monetary policy committee.

Andrew Sentance, the leading hawk on the ratesetting committee, said the rate of price increases would “stick” around current levels. His warning is in contrast to repeated assurances from Mervyn King, the Bank’s governor, that inflation will fall.

Sentance has been pushing for an increase in rates for nearly a year, but has never before been so blunt in his assessment of inflation.

“The MPC has entered what is going to be the most challenging period in its history,” he said. “We could be in for a prolonged period when inflation is much higher than we would like. The MPC may have to make some tough judgments.”

Inflation rose to 4.5% last week. The Bank has warned it will rise to 5% later this year before dropping back to the 2% target in two years.

Sentance, who leaves the MPC at the end of the month, makes clear he does not believe that, and that the Bank is looking at the problem in the wrong way. Bank economists believe spare capacity will cut inflation.

Sentance said international factors, such as rising commodity prices and the level of the pound, are more important and “that framework [how the Bank assesses the economy] needs to adapt to the way the economy has changed”.

His comments imply criticism of the Bank governor, who has said repeatedly that inflation is under control if higher Vat and energy and import prices are stripped out.

“It’s quite important that we don’t go down this route of stripping things out of the inflation index,” said Sentance. To do so risks losing credibility with the public.

His comments follow an interview yesterday with Spencer Dale, the Bank’s chief economist, who has been voting since January for higher rates. He also warned that inflation “could persist longer” and that people should prepare for higher rates.