Belfast Telegraph

David Prosser: The case for an interest rate rise

In voting for an interest rate rise, Andrew Sentance is likely to find himself in a minority on the Monetary Policy Committee for many months to come.

Barring surprises, it now seems unlikely the MPC will put rates up before the end of the year. After all, the Bank of England's warning last week of persistent inflation was accompanied by equally gloomy growth forecasts.

Still, we should not write Mr Sentance off as a lone voice. A head of steam is building up among those who warn that with inflation having been above target in 41 of the past 50 months, too much of it is becoming hard-wired into the economy. The Bank itself now says above-target inflation is likely to persist for a year longer than it thought as recently as May.

In that context, it is worth noting that a rise in base rates from 0.5 to 0.75 per cent, the increase for which Mr Sentance has pushed, would still leave the cost of borrowing at a historic low (meaning a 350-year low, excluding the period we have just been through).

The impact on the economy – and specifically on inflation, at least immediately – would be tiny.

What such a rate rise would signal, however, is that the MPC is not prepared to allow higher inflation to become completely entrenched. This slightly more nuanced argument is worth some thought.

Belfast Telegraph


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