New MPC members sound alarm on inflation

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Interest rates look set to head upwards next month to 5 per cent after the Bank of England's two newest policymakers yesterday sounded the alarm over the prospect of rising wages.

Being quizzed for the first time by MPs, Andrew Sentance and Timothy Besley attempted to avoid getting pigeonholed as either hawks or doves. But both sounded nervous about the chance that inflation could remain above its 2 per cent target despite the fall in oil prices.

Mr Sentance, a former chief economist of British Airways, said there was a "significant worry" that inflation could "begin to feed into wage increases", while Mr Besley said the Bank should "keep a careful eye on possible second-round effects". Their comments follow attempts by the Bank's Governor, Mervyn King, to play down hopes that inflation would fall back after the sharp drop in energy prices.

Mr Sentance, who joined the Monetary Policy Committee this month, said policymakers needed to "learn the lessons" from high money-supply growth, which tends to fuel inflation, in the 1980s.

Asked about the impact of energy inflation, Mr Sentance said: "We have to safeguard against that feed-through into wages, because that set off the wage price spiral that was so damaging in the 1970s and 1980s." A recent labour market survey showed that salaries for permanent staff were rising at their fastest pace for more than five years.

Mr Besley, a London School of Economics professor specialising in development economics and government policy, said that there may be "less relaxation in inflationary pressures than might have been hoped for as oil prices fall back". Sterling rose in expectation of another 25 basis point rise in November but later eased after the City bet against the likelihood of a prolonged run of rate increases.

James Knightley, at ING, said: "It's all fairly balanced stuff, and not wanting to give too much away. Overall they still look like they are going to raise rates in November ... but the comments do suggest that it's not going to be another series of rate hikes because they are still worried about growth."

So far the housing market has shrugged off the impact of August's base rate increase to 4.75 per cent. Retailers are worried about the impact of another jump ahead of Christmas, especially given that record oil prices over the summer are still feeding through to shoppers' energy bills.

Mr Sentance, trying to duck the issue of whether he would be more likely to side with the hawks or support David Blanchflower, the sole MPC member to vote against August's rate rise, quoted the economist John Maynard Keynes: "When the facts change, I change my mind.

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