A FINANCIAL STORM may have been raging outside, but inside the Bank of England’s marble halls things were calm on Friday. Up on the monetary policy committee corridor, Andrew Sentance, the former CBI and British Airways chief economist, was concerned about the world economy but not for the reasons you might expect.

Since joining the MPC in October last year, Sentance, 48, has voted to raise Bank rate in eight of the ten meetings he has attended (his August vote will not be revealed until this week) making him a surprise “hawk” on the committee. Before he joined, the supposition was that his business background would make him a natural “dove”; at the CBI he was often the voice calling for lower interest rates.

But what has influenced him most in recent months, and what continues to concern him now, is the strength of the global economy, and its impact on UK inflation. If the global economy continues strong and demand in Britain fails to slow as predicted, he will continue to be a hawk.

“I know from my experience with BA that global economic conditions can have quite an impact on the growth and inflation environment here. That doesn’t mean we’re impotent but we may have to lean in a different direction to keep the UK economy on an even keel,” he said.

“I don’t think you can answer the question about why the UK economy has picked up so strongly without recognising that it is getting a lot of impetus from the world economy. And you can’t answer the question about why inflation has picked up without recognising that energy and commodity prices have picked up.”

While money markets are revising down their expectations of the extent to which interest rates will rise – and in America are talking of cuts – Sentance said it is too early to judge the impact of the crisis in credit markets.

“We’ve seen periods of volatility in financial markets before; we saw one round in February-March last year,” he said. “As far as monetary policy is concerned, the benefit of our monthly cycle of meetings is that we get a chance every month to assess how all the factors, including financial markets, are affecting us.

“Financial-market developments will only impinge on inflation and the real economy insofar as they have substantial effects on businesses and households and the way they behave. I wouldn’t want to draw any conclusions at the moment.

“When we’ve looked at this in our previous meetings, at most of them there have been concerns about the US economy, but the broader global picture has been very strong. Asia has a lot of impetus and the European economy has rebounded. Our view is that that global economic growth still has a lot of momentum.”

How does he see the outlook for interest rates, given that most people interpreted last week’s inflation report from the Bank as signalling that a Bank rate of 6% is likely, but probably no more.

“The correct message from the inflation report is: It depends,” he said. “We’re quite careful not to say we have this predetermined view of interest rates. We reassess the evidence every month and last month we decided it wasn’t appropriate to raise rates. But that doesn’t prejudge whether it will be appropriate in the future.”

What it depends on, apart from the global economy, is whether the “noticeable” slowing of Britain’s economy envisaged in the inflation report comes about.

The Bank took the unusual step of publishing its own growth estimate for the past year, 3.5%, to show how strong it had been and the extent it needs to slow.

“The momentum of growth in demand is stronger than the official figures are showing,” he said. “I’m quite comfortable with this; over some period of time growth appears to have been stronger than the ONS [Office for National Statistics] was showing. This evidence is consistent with the view that you need to be more proactive with regard to interest rates.

“Having raised interest rates five times, we are expecting some noticeable slowing of the economy, not to a very weak rate of growth but to somewhere around 2.5% rather than 3.5%.”

The MPC, he said, should not duck difficult decisions for fear of surprising the markets. “If we had a policy that surprises are bad, we could find ourselves hemmed in too much,” he said.

Nor should it come as a surprise that some in business, particularly hard-pressed retailers, having supported the Bank over 10 years of independence, are starting to accuse the MPC of “overkill”. This, said Sentance, is exactly what he would expect.

“We had a decade between the mid1990s and the mid2000s when consumer spending growth was in its the strongest 10-year period since the war,” he said. “If we’re going to continue to have this stronger global growth and a rebalancing in favour of investment, we’re going to have to have a period where consumer spending growth is a bit weaker.”

The MPC, he said, understands the pressures business has been under. But in the end, the message has to be uncompromising.

“What I’d want to say to business is: Don’t assume the pricing climate has changed,” he said. “The Bank of England is still here with its 2% target and determined to get inflation back on track. The danger is that, because inflation has run ahead for a while, people think this can continue. Our job is to ensure it doesn’t continue.”

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