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Sentance worried inflation could rise above 5%

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25/03/2011

Andrew Sentance has predicted inflation could rise above 5% this year and repeated his calls for a gradual increase in interest rates and cutting off of monetary stimulus. On the day the CPI rate of inflation was revealed to be 4.4% in February, up from 4% the previous month, Sentance said the target rate of 2% remained “optimistic”, predicting “it could easily rise above 5% later this year”.

Speaking this afternoon at the CBI East of England lunch, he said: “Once businesses and individuals come to expect higher inflation – and there are increasing signs that they are beginning to do so – these expectations will be much harder to dislodge.

“In this environment, with inflation running very considerably above its target level and set to rise further, failure to take timely monetary policy action risks a more abrupt and destabilising rise in interest rates in the future.

“That is surely something which the businesses represented here today would not want to see. And that could be a much bigger threat to future economic growth than the gradual increases in interest rates which I have been arguing for since the middle of last year.”

He also said the political turbulence in the Middle East and the impact of the earthquake and tsunami in Japan would only have short-term effects on global growth.

“The economies of Asia and other emerging markets are likely to continue to provide strong momentum to global growth, and the gradual recovery which is emerging in the United States and continental Europe should continue to gather momentum,” he added.

He also said VAT increases and imported price pressures would add to inflation in the short term and reminded his fellow MPC members of its job.

“The MPC’s remit is clearly couched in terms of keeping consumer price inflation on target and we have a responsibility to take action when we see the sort of significant upside deviations we have experienced, not just recently, but over a number of years now.”

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