Leading economist and former member of the Bank of England's Monetary Policy Committee Andrew Sentance has criticised a planned shake-up of the Bank's interest rate regime and criticised the Bank for "not doing what's right for the UK".
Dr Sentance,now senior economic adviser to accountants and consultants PricewaterhouseCooper, made the remarks in an interview with the Sunday Herald following a presentation at a private dinner in Glasgow last week.
The economist, known as an outspoken "hawk" on monetary policy during his time on the MPC from 2006-2011 also bucked the consensus with a prediction that interest rates would start to rise "in the latter part of the year", expressing his preference for a rise to an inflation-equalling 2% "within a year or two." Most analysts currently predict rates being held at the current 0.5% until mid-2016.
The BoE last week fleshed out plans, first announced at the end of last year, to overhaul the way it sets interest rates, as part of a drive by Governor Mark Carney to improve transparency. The planned move, which will reduce the MPC's 12 meetings a year to eight, will also see the interest rate votes and minutes published at the same time as a decision, rather than two weeks afterwards.
Sentance strongly criticised the move, which he said was inspired by a similar move by the European Central Bank, saying that it would make the MPC less responsive to economic data, and was "only suitable for a fair weather economy."
He said: "I am not in favour of these changes as they are currently specified. Meeting every month when there's a lot of new data published every month seemed a good routine for the BoE. I didn't feel that the meetings were too frequent, and I think there is a danger that they are setting up a meeting schedule for a fair weather economy or one that's chugging along ok. The fact that the ECB have gone to eight meetings a year is not a persuasive argument for us to do it. We should do what's right for the UK."
"But the economy is not always like that and in that case you then have to have more emergency meetings which is not always a good thing."
"I also don't agree with releasing the minutes at the same time as the monthly meeting. The practicalities of that are quite difficult as if you imagine that the minutes communicate an awful lot of things, not just the decision itself but the thinking of the committee and they record differences of view, I don't see how you can practically put all that together unless the decisions have been effectively taken some time previously."
"I'm in favour of releasing the minutes quickly, but if you do it at exactly the same time either the minutes are not going to include all the information they should or [it means that] the decision will be pre-cooked. I would rather the Bank had [undertaken] more consultation on these matters than it did."
On the interest rate decision, Sentance underlined his long-standing belief that it was better to introduce early small rises in the interest rates when economic conditions were relatively benign, rather than be forced into more drastic rises under pressure from external factors.
"You can't wait until all the signals are flashing amber and read because then you would have to push them up quite quickly. I think we will see rate rises later this year, as long as there is not a major disruption to economic growth."
"Markets are beginning to read into the runes the beginnings of rate rises earlier this year in the US, and the BoE will have the same philosophy as the Federal Reserve that it's better to start with a gradual rise sooner rather than later, and a move in the US will give the BoE more comfort that they are moving with the tide of international monetary policy."
In meetings with business people in Scotland in his capacity as an effective brand ambassador for PwC, Sentance has shared a generally benign view of the UK recovery and the economic strategy pursued by the UK Government, saying that he believed that "the term austerity has been overused." He has however warned of a "delivery risk" in plans to improve infrastructure, skills and devolution of the "over-centralised" UK.
He said: "In many respects we are in quite a positive economic environment, the economy has been growing, not just in London and the Southeast. Unemployment has been coming down across most of the country, consumers are feeling a bit better, wage increases are starting to pick up, and inflation is very low or slightly negative... I don't think we need to worry about deflation, but [low inflation] has created positive real wage growth."
Identifying potential risks to the recovery he singled out the risk of the "wrong decision" [in favour of a "Brexit"] in the forthcoming EU referendum disrupting a long-established business environment, though he added that consensus between all the main powers made this unlikely.
He said that increased devolution, both for Scotland and for the "northern powerhouse" of greater Manchester offered opportunities for "streamlining" the way that the UK operated, though he said that there was a risk of it "not working out"
" [Devolved economic powers] might not function well if there is a lot of tension between the devolved Scottish Government and the UK Government, or it could be that the powers are used in a way that doesn't help the progress of the Scottish economy."
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