Despite its recent slip, inflation will remain above the Bank of England’s 2 percent target in the U.K. for a long time, as the bank takes no action to bring price rises down, Andrew Sentance, a former member of the monetary policy committee, told CNBC on Tuesday.
Figures released on Tuesday showed inflation fell to 3.6 percent in January from 4.2 percent a month earlier as the effect of a rise in value-added tax faded. Sentance said that since the middle of the 2000s, inflation has been at a “sustained high level” above target.
“It’s a sign of the times that when inflation falls below 4 percent it seems a good thing,” Sentance said.
The Bank of England decided last week to boost its asset-purchasing program, also known as quantitative easing , by 50 billion pounds ($79.3 billion), to kick-start the economy.
“We’ve yet to see a decisive move below the target [for inflation] and in my view the bank was a bit premature in terms of wheeling out additional quantitative easing before they had really got reassurance that inflation was going to fall decisively below the target,” Sentance said.
“In my view I don't think we’re headed for a sustained period of below target inflation,” he added, in reference to some policymakers’ prognosis that price rises will fall to below the 2 percent later this year.
Sentance predicts inflation will hover between 3.5 percent and 4 percent, as part of a prolonged period of above-target inflation.
“There is a persistent tendency of inflation in the U.K. to run above the target and I’m not sure the monetary policy committee has got to grips with that,” he said.
Moody’s warning that it may cut the U.K.’s triple-A rating should not change investors’ view of the country, as it has “quite a robust deficit reduction plan and it's sticking to it,” Sentance said.
“We need to be a bit careful about over-sensationalizing these statements from the ratings agencies,” he said.
It shows that the current economic conditions create a very difficult environment for public finances, however, as governments cannot rely on strong growth to get them back into shape and have to resort to cutting public spending and raising taxes, he noted.
“The missing ingredient on the growth side is the supply–side strategy,” Sentance said. “The government has started to outline a supply-side strategy where they’re deregulating the business climate, reforming the tax system and I think we need to go further and faster on that agenda.”
The crisis has affected confidence in the policymakers’ ability to fix things, and this is partly why corporations are sitting on their cash, according to Sentance, who said the government should recognize that it will take relatively long for the financial system to heal and instead focus on other, supply-side measures.