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Thursday, October 14, 2010

The Bank of England's Credibility

Andrew Sentance, a member of the MPC of the Bank of England, has warned that the Bank risks losing its credibility over inflation worries.

Sentance has long argued for the 0.5% interest rates to be raised, in order the slay that inflationary monster that he perceives to be lurking in the economy.

Sentance is wrong:

1 The credibility of the Bank is not an important factor at this point in the economic cycle (ie a slow return to growth after a debilitating period of recession), restoring growth is the important issue.

2 The economy is not yet in a position to withstand an increase in rates.

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