The global climate is now more inflationary and it seems unlikely that the margin of spare capacity in the UK economy will prevent current inflationary pressures from becoming embedded, without monetary policy being tightened. We have heard the news today that CPI inflation has risen again – to 4.4% – and it could easily rise above 5% later this year. 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. 6  See Sentance (2011). 7  This is a point repeatedly made by Orphanides. See his recent comments in Orphanides (2011), for example. 8  BIS central bankers’ speeches  References Orphanides, A. (2011) “The role of central banks – lessons from the crisis” Panel remarks at the VI International Symposium of the Banque de France on 4 March 2011. Sentance, A.
Andrew Sentance: Let it grow – how monetary policy can support sustainable economic growth Speech by Mr Andrew Sentance, External Member of the Monetary Policy Committee of the Bank of England, at the Confederation of British Industry (CBI) East of England Annual Lunch, Horringer, Bury St Edmunds, Suffolk, 22 March 2011. All speeches are available online at www.bankofengland.co.uk/publications/speeches. *  *  *  I would like to thank Tomasz Wieladek and Adrian Chiu for research assistance and I am also grateful for helpful comments from other colleagues. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. Good afternoon, ladies and gentlemen. I am delighted to have the opportunity to address this year’s CBI East of England annual lunch. In my time as a member of the Monetary Policy Committee, I have particularly appreciated the opportunity to talk to businesses and business groups around the UK. As an economist with strong roots in the business world, I place great weight on the input that the MPC receives from the business community, which we get from a wide variety of sources – including business surveys and the reports from the Bank’s Agents. But there is no substitute for visiting individual companies and meeting business groups to gauge economic sentiment at the grass roots level around the country.