The Bank of England (BoE) Monetary Policy Committee's (MPC) 'Arch Hawk', Andrew Sentance, has called for increases in interest rates in order to save the BoE's credibility.


The MPC is tasked with keeping inflation in line at about 2% by raising and lowering interest rates as inflation goes up and down.

With (official) inflation now well over 3% and climbing and many economists believing it will top 4% during 2011, there is a prima facie case that the BoE isn't doing its job.

Of the nine members of the MPC, Sentance is the only one openly calling for rate rises, but he is at present balanced off at the other end by Adam Posen who takes the view that rates should be kept low and more quantitative easing (QE) is needed. Most in the middle are content to keep the ship level at present by doing nothing. But the real question is: is the ship sinking or not?

Mervyn King, the Governor of the BoE, however seems to believes that external forces such as weather hitting crops yields and the price of oil are the culprit and, as they are temporary influences, that inflation will drop off with no need for the BoE to upset the recovery apple cart by raising rates. More doing nothing and 'wait and see'. Mr King is due to make a speech tonight where he is expected to reiterate his views.

Sentance on the other hand thinks that yes there are external influences but that should not be assumed so the BoE should act. He splits the influences on inflation into three channels – Import prices, demand and the pricing climate. He says that the MPC "needs to steer a middle course when it comes to global pressures on inflation. We should be prepared to look through genuine one-off shocks." He is worried that if rates aren't raised slowly now we may end up by being forced into raising them 'more aggressively' in the future, which would then cause more damage down the road.

One wonders how this little struggle for influence will pan out in the coming days and months and who will resign first?

But calls for interest rates will cause worry for many. Business owners looking for finance as well as current and potential mortgage holders will all be hoping that rates stay low for at least a little longer. On the other hand those with savings and investments will be hoping for a rise soon to bolster their meagre returns.

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