Transcript of Andrew Sentance interview on Sky News, 31 May 2011

JEFF RANDALL:

This is Andrew Sentanceís last day at the Bank of England and this will be his final broadcast interview as an MPC member.  After tonight he will go into purdah for three months so letís hear from the Bank of Englandís voice of dissent, Andrew Sentance.  Andrew, lovely to see you, thank you for coming in.  Youíve been on the MPC for pretty much five years and for much of that inflation has been above target, why?

ANDREW SENTANCE:

Well I think itís not one simple reason.  I think a very important ingredient has been weíve had much more inflationary pressure from the global economy than we had in the period before I joined the committee.  The Governor of the Bank of England used to talk about the Ďnice decadeí where prices were falling on global markets and that was helping to hold down inflation.  That hasnít been the experience whilst Iíve been on the committee.  Weíve also seen other things happen domestically that have not helped us control inflation: a big fall in the pound and also the spare capacity in the economy created by the recession hasnít held down inflation in the way in which many people have expected so weíve had more international influences, weíve had more influences from a weakening in the pound and that hasnít been offset by the impact of the recession on holding down wages and prices.

JEFF RANDALL:

You donít need to be a very clever member of the MPC though to understand that a falling pound will encourage imported inflation.

 

ANDREW SENTANCE:

I think the issue with the fall in the value of the pound is how big its effect will be and how long it will continue.  Iíve looked back at previous periods when the pound has moved liked in the early 90s when it fell and when it rose again in the late 1990s and it seemed after those episodes the effects were quite long lasting and thatís because weíre an economy very open to international trade and the value of the pound affects the amount of  competition in markets and the way in which companies price in markets and so I do think we have to take the value of the pound very seriously.

JEFF RANDALL:

Isnít the truth that in recent times, perhaps over the last two years, since the credit crunch really took hold, the game has changed at the Bank of England.  In effect the inflation target de facto has been abandoned and what the bank is really pursuing is a growth policy?

ANDREW SENTANCE:

Well thatís not certainly the remit that Iíve been following and the remit that the Chancellor has set for the committee as a whole. 

JEFF RANDALL:

Not your remit but if you read the speeches of other colleagues and perhaps those of the governor, thatís the case isnít it?

ANDREW SENTANCE:

I think one of the things thatís been happening is that the Bank focuses very much, particularly when inflation is a way from target, on its own forecast of inflation so if you look at the Bankís inflation report the argument is that yes, inflation has gone up but it is going to come down because of the various factors that pushed it up are going to drop out of the system.  The thing that I think has struck me, particularly over the last six months, is the way in which we put together the forecast doesnít put enough weight on the sorts of things Iíve just mentioned: the influence of the international economy, oil and commodity prices, the impact of the value of the pound and it gives too much weight to the Ö

JEFF RANDALL:

So the Bankís model is flawed?

ANDREW SENTANCE:

Well I think that Ö

JEFF RANDALL:

Can I just throw a couple of stats at you?  Between August 2007 and May 2010, so the last three years, the Bankís average forecast for inflation has been 1.9%, the outcome is 3.2%.

ANDREW SENTANCE:

Well Iíve been quite open about this in the speeches that Iíve made recently.  When I first started voting for higher interest rates in the middle of last year, I think you could have seen it as a difference of judgement on the economic situation but as time went on, I began to think that actually there were some more fundamental differences between my view and those of the majority of the committee but I think a way grew up of thinking about the economy in the stable decade that we had from 1997 to 2007, that hasnít really served us very well during the period of the financial crisis and the recession.  I think we should revisit our thinking on the economy in the light of that experience.

JEFF RANDALL:

So itís not just the Bankís model, its technical model, it is the mind-set of the MPC members? 

ANDREW SENTANCE:

I think itís because actually when people talk about models of the economy, itís not like the engine of a car that actually delivers on a predictable way, the economy is a massive complex thing.  In the UK we have about 60 million people, in the world economy we have over six billion people and all their decisions are affecting the way the economy works so any model that we have is a very simplified representation of that and we have to keep changing and updating it as we get new evidence.  

JEFF RANDALL:

You see a sceptical man would say look, this isnít a mistake, these economists on the MPC, they know what theyíre doing, theyíve just changed the game. Theyíve started to talk about growth, about employment, theyíve let inflation go hang Ė deliberately.

ANDREW SENTANCE:

The way that I see it is that we went through a period when there seemed to be a very predictable relationship between growth and inflation and so when we were worried about inflation it was because growth was particularly strong but I think now weíre in a much more complex situation where the influence of the international economy, the changes that weíve seen in the value of the pound, the changes that have followed from the financial crisis, those have changed this relationship between inflation and growth so the fact that inflation is high is not necessarily associated with strong growth.  In fact in some ways high inflation is squeezing out the growth in the economy because itís squeezing peopleís disposable income.

JEFF RANDALL:

Precisely so, and yet many of your critics, and weíll come on to that later, have said well look, he wants to put up interest rates, heíll kill the economy.  If inflation is running ahead of pay increases, real incomes are going down, how does that help growth?

ANDREW SENTANCE:

I think when we talk about interest rate rises we really need to get a sense of perspective because interest rates were taken down to the lowest level, not just in recent times but in the whole three hundred plus year history of the Bank and they were set at that level to deal with a very different situation from the one we now have.  So what Iíve consistently argued for is trying to move interest rates up gradually because I think the worry that I have is that if that doesnít happen then we will face a situation where interest rates have to move much more sharply and that in itself will also be, will be a bigger threat to growth in the future.

JEFF RANDALL:

Andrew, weíve got inflation at 4.5%, the target is 2%, clearly something has gone wrong.  Is it the Bankís model or is it the mind-set of the members?

ANDREW SENTANCE:

I think youíd have to talk to the other members about that.  All I can say is whatís driven my Ö

JEFF RANDALL:

Youíre very kind to them but theyíve been predicting inflation to run at a much lower level, theyíve been wrong.

ANDREW SENTANCE:

Yes and what Iíve highlight I think, there is a big risk now emerging to the credibility of the Bank and peopleís views of inflation in the future because the inflation report can explain away in various ways why inflation has gone up and can say it is going to go down in the future but the person on the street, the people going out doing their shopping, are experiencing inflation and if inflation does not come down in the way that the Bank is suggesting Ė and I think there is a big risk that thatís the case Ė then thatís going to have a serious knock-on effect on the credibility of the Bankís commitment to its inflation target and so I think thatís a risk for the future. Iím not saying itís happened now but I think it is a big risk for the future.

JEFF RANDALL:

If as you say the Bankís credibility is under threat, I think what you mean is in the end wage negotiators start saying right, we donít believe this number, weíre going to assume much higher rates and of course thatís self-fulfilling.

ANDREW SENTANCE:

Thatís the big worry, that in the past when inflation has gone up itís been a ratchet effect, where people gradually get used to higher levels of inflation and we are trying to keep inflation at a very low level.  Weíve actually fought a big battle against inflation in the UK, you can remember the time in the 1970s when it was up in double digits and weíve fought hard to get Ö

JEFF RANDALL:

Well we had stagflation. 

ANDREW SENTANCE:

Yes, a similar Ö well a similar combination of high inflation and low growth that we have now but the point that I would emphasise is weíve actually established in the period from the mid-1990s to the mid-2000s the UKís reputation as a low inflation economy.  That reputation was hard won and I think we need to Ö

JEFF RANDALL:

How close is that to being lost?

ANDREW SENTANCE:

Well I think it requires some changes in policy, thatís what Iíve consistently said.  It doesnít require at this stage I think big increases in interest rates but it could in the future if we donít take action now.

JEFF RANDALL:

As well as looking after the countryís monetary integrity, the Bank of England is soon going to be looking after its banking integrity, the countryís banking integrity. Does it have the capacity and the wherewithal to cope with all that given that itís not been very successful on inflation?

ANDREW SENTANCE:

Well I think there are very big challenges for the Bank in terms of its organisation, the responsibilities of the Governor and the Deputy Governors and that is being I think highlighted at the moment by the Treasury Select Committee and the Court of the Bank of England Ö

JEFF RANDALL:

Do you think that the Bank simply canít cope because thereís too much work?

ANDREW SENTANCE:

No, I think the Bank has very capable people running the organisation but the way in which the Bank needs to run, obviously as with any private sector organisation, it needs to take account of changes in responsibilities.

JEFF RANDALL:

All right Andrew, thank you for that.  Stay with us, weíve got much more to discuss later in the programme.

[End of Part One]

JEFF RANDALL:

Welcome back to Jeff Randall Live and an exclusive interview with Andrew Sentance on his last day at the Bank of England.  For some time he has been urging the Monetary Policy Committee to increase the interest rates to combat inflation.  In that period he has faced some fierce attacks from a former colleague and other economists.  Andrew Sentance is still with me at the Gherkin, Andrew what was it like to be a lone voice in the fight against inflation?

ANDREW SENTANCE:

Well I think I hadnít appreciated I think before I was voting in a minority of one, the number of different angles you needed to cover when you are making a case, not just to your colleagues on the committee but also arguing points with the staff at the Bank of England, who I felt there were points of the way we were analysing the economy which were not quite right.

JEFF RANDALL:

You thought the Bank was dysfunctional.

ANDREW SENTANCE:

Well no, I didnít think the Bank was dysfunctional but I think a way of thinking about the economy had grown up during a much more stable period which hadnít adapted to the changes weíd seen and of course another thing was I wanted to get my argument out into the public domain and I think I came on this show around about that time but when one person is trying to do all those things and arguing your case within the committee, arguing points with the staff at the Bank of England and externally, that puts quite a bit of pressure on you, yes, thatís true.

JEFF RANDALL:

Youíve taken some pretty nasty ad hominem criticisms, why did it become so personal?

ANDREW SENTANCE:

I think youíll have to ask the people who have made personal comments what their motivations are.  Iíve always, I think if you look at my track record and everything Iíve said, itís all been about the economic issues and thatís the level at which I think we need to conduct the debate on monetary policy.

JEFF RANDALL:

One of your former colleagues was David Blanchflower, Professor Blanchflower, now at Dartmouth in the States, Dartmouth University and also I think at the University of Stirling in this country, or in Britain.  I think weíve got a quote from him here.

DAVID BLANCHFLOWER:

If you think about it, the argument that we should focus on inflation over the last ten years and that would solve everything, proved absolutely wrong.  We were told that if you focused just on inflation then we couldnít have a recession, weíll weíve just had one so focusing on inflation is the wrong thing to focus on, we should be focusing on output.  Inflation is not the great demon. 

JEFF RANDALL:

Is he right?

 
ANDREW SENTANCE:

Well I think the argument that David Blanchflower is making there is not consistent with the Bankís objective.  The Bank has a very clear remit from the Chancellor of the Exchequer and from Parliament which is to keep inflation at 2% and there is a good  reason for that because while you might see stronger growth in the short term if you keep interest rates artificially low, that hasnít helped the performance of economies over the longer term, thatís been a big lesson that weíve learned over the last fifty years and so following the inflation remit is not just what the Bank of England has been asked to do, it is actually the right policy for the longer term growth of the economy.

JEFF RANDALL:

He said that you are, quote, Ďextraordinarily out of touch and you have had [poor?] recessioní.

ANDREW SENTANCE:

Well I would just allow people to make a broader judgement of my contribution to the Committee. Obviously if you are in the public domain you get mixed comments on your views and there are a range of views out there on what should happen to monetary policy.

JEFF RANDALL:

He rates himself, do you rate him?

ANDREW SENTANCE:

As I say, I donít want to be drawn into personalities.  I think the best way to conduct yourself as a member of the Committee, and this is the way I have continually tried to operate, is talking about ideas and issues and the state of the UK economy and I would challenge the statement that I might be out of touch in the sense that I have spent most of my career in the world of business, looking at business surveys and I have made very regular visits all around the country and so I do feel that my views are actually rooted in whatís going on in the economy.

JEFF RANDALL:

Aside from personalities, what about the way the MPC is structured and the influence of the Governor?  I mean Mervyn King is a very forceful individual, he sits there a giant in the British economy, is he too domineering, did he force through group-think?

ANDREW SENTANCE:

No, I don't think thatís the way the committeeís operated.  I think inevitably if you have got somebody like Mervyn King as Governor, who has been in the Bank for a long time, he is a very significant influence on the Bank and on the Monetary Policy Committee and thatís probably quite the right thing.  The job however of external members such as myself who come in and are not full-time career officials at the Bank is to challenge some of the thinking and thatís what Iíve tried to do and I feel I have got my arguments out in the public domain and in the committee.  They havenít ultimately persuaded the committee but I see that as sort of unfinished business because I think we are going to need to see a rise in interest rates and I still think we should have started making them sooner rather than later.

JEFF RANDALL:

On the basis that your forecasts have been much better than the MPCís generally, when will inflation peak and at what level?

ANDREW SENTANCE:

Well I think that is very difficult to say because it depends on many factors and Ö


JEFF RANDALL:

Have a go.

ANDREW SENTANCE:

Well I think the current Bankís forecast is for inflation to go up higher than it is now, up towards around about 5% and I donít disagree with that.

JEFF RANDALL:

Could you see it going higher than 5%?

ANDREW SENTANCE:

Thatís not my central view but I think that is a long way away from the 2% target. I think my worry more than there might be a higher peak than 5% is that having gone up to a 4-5% level, it is going to take quite a long time to get inflation back down again and thatís one of the arguments, itís not the only argument that Iíve made but it is one of the arguments for higher interest rates.

JEFF RANDALL:

Because Adam Posen, one of the MPC doves, he said well look, if itís not down on target by the middle of next year he will feel perhaps compelled to resign.  Is it going to be on target by the middle of next year, 2%?

ANDREW SENTANCE:

I don't think weíre going to back at 2% by the middle of next year, I think even the central forecast in the latest inflation report doesnít suggest that thatís the case and in my view there is more upside risk from the inflationary pressures in the global economy, a follow-through of the fall in pound weíve seen in the last few years and the fact that wage increases I believe will begin to drift up, they are already drifting upwards and will drift up further if we continue to experience high inflation.

JEFF RANDALL:

Feed back into inflation.

ANDREW SENTANCE:

Yes and thatís exactly the sort of scenario that the MPC should be safeguarding against.

JEFF RANDALL:

But itís not!  

ANDREW SENTANCE:

Well what I find, I think, most difficult Ė I can accept an argument that says because growth in the economy is fragile, we are only just coming out of recession, we should be very careful with interest rate increases and I fully accept that argument but what I find difficult to see is a Monetary Policy Committee not responding at all when inflation is so much above target and the economy has turned around so far from the situation we were in a couple of years ago when we bought interest rates down to half a per cent.

JEFF RANDALL:

Do you think the Bank is in denial about its own shortcomings?  I mean it never really did confess, did it, to its role in that huge build-up of personal debt in the run up to the crunch?  It never really said yes, we got it wrong.  The Governor blamed the banks.

 
ANDREW SENTANCE:

Weíll have to I think wait for history to make a broader judgement. I personally donít think that monetary policy was at the root of the problems weíve seen with the financial crisis.  It was a global financial crisis driven by global forces and I supported the monetary policy that the Bank adopted for most of the time that I was on the Committee until the middle of last year.  The thing that Iíve been concerned about and I remain concerned about as I leave the Committee, is that we put policies in place for a very different situation for the one we now face, we put policies in place for an economy that was going into a deepening recession and now weíre coming out of recession, the economy is recovering and weíve put policies in place to address deflation when we have got actually relatively high inflation.

JEFF RANDALL:

Is the Bank letting down the British economy?  Ordinary people, savers, people who are having their incomes eroded by inflation?

ANDREW SENTANCE:

Well I do think the fact that inflation has been allowed to run above target for so long is a disappointment and I think that people quite rightly would express concern about that.  We get a lot of correspondence, I get a lot of personal correspondence from people saying we canít quite understand whatís going on here.

JEFF RANDALL:

Finally, what about the Governor himself who has made several interventions on the subject of fiscal policy, something that the Bankís Governor shouldnít really go near.  Did he stray towards the line of being too political?

ANDREW SENTANCE:

I think the statements that the Governor has made about fiscal policy Iíve generally agreed with. I  think that he Ö

JEFF RANDALL:

Youíve agreed with them but should he have made them?

ANDREW SENTANCE:

Well I think a central bank Governor obviously has to have some concern that the fiscal position is sound and then thereís a question about judgement, about what exactly you say on that subject but I donít feel thatís been a big issue for me and I think we do now have a fiscal plan being implemented that should consolidate public finances and the challenge that I think that perhaps weíre being a bit slow to address is actually getting monetary policy back on track.

JEFF RANDALL:

All right, Andrew Sentance, on your last day at the Bank, many thanks for coming in.

ANDREW SENTANCE:

Thank you.