January 27, 2010 9:59 am

MPC’s Sentance sounds warning on recovery

The UK economic recovery is “clouded by great uncertainty” despite the return to growth, as credit remains hard to obtain and public spending is slashed but inflation remains too high, a member of the Bank of England’s monetary policy committee warned on Wednesday.

Comparing the exit from the recent recession to the UK’s experience of “bumping along the bottom” after the downturn of the early 1990s, Andrew Sentance, an external member of the MPC, said that it was ”very understandable” that there is still a lot of nervousness and uncertainty about the future pace of growth”.

In addition to the fact that uncertainty was an “inevitable consequence” of the fact that recovery was in its very early stages, Mr Sentance said that the economy was also in danger from the twin threat of banks seeking to shore themselves up and public sector retrenchment.

As well as the “balance sheet adjustment taking place in the financial sector, and in particular within banks ... the UK economy is likely to face another drag to demand as the government seeks to rebalance its finances, and cut the very large public deficit which has emerged over the recession,” he said.

Nevertheless, Mr Sentance displayed some optimism about the outlook for the UK.

He appeared to argue that GDP figures out on Tuesday showing that the economy crept out of recession with 0.1 per cent growth in the fourth quarter would be revised up as other business surveys pointed to stronger growth.

He also suggested that fears that cuts in public spending would lead to a particularly sharp slowdown in the economy ”should not be overplayed”. “It is the growth of activity and spending in the private sector which will ultimately determine the pace of recovery in the UK economy over the next three to five years,” he said.

He said that the recent rises in house prices suggested that the recovery in housing was more likely to resemble the housing market recovery after the 1980s recession than the protracted depression in prices that followed the 1990s downturn. This was because there was less of an overhang of supply.

He also sounded warier than some other members of the MPC about the risks posed by inflation, suggesting that the committee would need to make a judgement on whether monetary policy was too loose.

“The combined impact of low interest rates and quantitative easing should continue to be supportive of economic growth through 2010, though as the current strains in the financial sector begin to ease, the MPC will need to assess whether monetary policy needs to be so supportive of growth, and whether there are inflationary risks from such a policy,” he said.

Although much of the strength of inflation recently could be explained by the weakness of the pound and energy prices, he expressed concern that the amount of slack in the UK economy might be lower, helping prices to rise more aggressively.

”While the volatility of inflation can be largely explained by global factors, it is not clear that this can fully account for the above-target inflation we have experienced at the same time,” he said.

”Inflation has been, on average, above target for most of the last three years. In 27 of the last 36 months, inflation has been above the 2 per cent level – and below target in just nine months.”

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