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UK Needs ‘Monetary Realism’: Ex-BoE Official

The Bank of England
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The Bank of England

The Bank of England (BoE) may have been given the green light to use "unconventional monetary policy instruments" and overshoot its two percent inflation target in the U.K's annual budget on Wednesday, but it actually needs to engage in some monetary policy "realism", Andrew Sentance, senior economic advisor at PwC, told CNBC.

In his annual budget statement on Wednesday, the U.K.'s finance minister, George Osborne, said that the Bank of England (BoE) could use more "unconventional" monetary policy to help the country return to growth, even if it caused inflation. "As we've seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity," Osborne said as he presented the budget in the U.K.'s parliament yesterday.

(Read More: The UK Budget Did No Favor to the Pound)

Andrew Sentance, a former member of the Bank of England's monetary policy committee, told CNBC Europe's "Squawk Box" that the central bank would need to end its 375 billion pound ($567.1 billion) quantitative easing program soon.

"The Chancellor was using this phrase which he and David Cameron (the U.K. prime minister] have used a lot in the past which is 'monetary activism' and I wonder what this means in the current climate when interest rates have been at 0.5 percent for the last four years and you've already got a third of the government's debt sitting in Bank of England's vaults," Sentance said.

"That's a pretty activist monetary policy in my view, and one that has already gone too far. Instead of monetary activism we need monetary realism," he said, adding that Mark Carney, the incoming head of the BoE, would have to address some sort of exit from loose monetary policy.

A key change introduced by the finance minister included asking the Bank of England to consider adopting an "explicit forward guidance" policy in the hope that indicating its longer-term direction on interest rates (as the Federal Reserve in the U.S. does by saying it will continue its asset-purchases program until employment picks up) could encourage bank lending .

Sentance said there was a danger that the economy could become dependent on low interest rates.

"In a number of respects, the economy is in a period of incomplete adjustment…[but] at some point that adjustment is going to need to complete and at some point we're going to need to go to higher interest rates, if we become too hooked on this low interest rate environment and various forms of artificial support, that's not healthy for the economy," he said.

(Read More: Credit Rating Fears Return as UK Growth Slashed)

New economic forecasts also released on Wednesday said the country's growth prospects had halved for 2013 with the U.K. economy estimated to grow by 0.6 percent this year, compared with a December forecast of 1.2 percent. The Office for Budget Responsibility also said that net debt won't begin falling until 2017-18.

Contact Europe: Economy

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