Prospects for the economy are far better than those prevailing during earlier recessions in the 1970s, 80s and 90s, despite turbulence in financial markets, according to Andrew Sentance, a member of the Bank of England’s monetary policy committee.
The outlook now is merely for weaker growth, not meltdown, he said in a speech on Wednesday night to the Leicester Chamber of Commerce.
Mr Sentance’s remarks suggest the MPC remains deeply divided over whether a near-term move to cut rates is needed to prevent the economy from sliding deep into recession. The speech contradicts the views of fellow MPC member Sir John Gieve, who earlier this week warned “we must be careful not to underestimate the deflationary consequences of the credit crisis”, which prompted speculation a rate cut might be coming.
Mr Sentance set out a robust defence of the MPC’s approach to fighting inflation and sought to counter critics who have cast it as overly concerned with controlling prices. He noted that press commentary occasionally portrayed the MPC as, “inflation nutters”.
“First of all, we need to keep our focus on price stability as the prime objective of monetary policy,” he said.
In the 1970s and 1980s “we discovered that allowing inflation to creep up simply makes the economic adjustment which is ultimately necessary even more painful”.
All told, the economic outlook today was little changed from that set out in the Bank’s inflation report in August, which forecast flat gross domestic product growth with the possibility of slightly positive or negative growth in the quarters ahead.
So far, Mr Sentance said, disruption in the financial markets was really only affecting one sector – financial services.
“After a week in which it appeared that the financial markets went to hell and back, it is important to keep in mind that total financial services employment in the UK is around 1m out of 32m workforce jobs – about 3 per cent of the total employment,” he said.
“The impact of financial market developments on the other 97 per cent is the main issue that we need to worry about in terms of the performance of the economy,” he added.
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