Bank's Andrew Sentance calls for 'gradual' interest rate rise

Bank of England uber-hawk Andrew Sentance today called for a "gradual rise" in interest rates to bring stubbornly high inflation under control.

Sentance ruled out a "double-dip" recession and said the economy is far stronger than it was when the monetary policy committee slashed rates to a record low of 0.5% and started printing money.

"We need to adapt our tune to the changing performance of the economy," he said. "That now points to a gradual withdrawal of some of the stimulus we provided to the economy in more difficult circumstances last year — not so much as to undermine the recovery but to keep it on a low inflation path."

It came after official figures showed inflation eased from 3.4% in May to 3.2% in June — still well above the 2% target.

Core inflation, which excludes volatile items such as food and energy costs, increased from 2.9% to 3.1% in a sign the cost of living is not falling as fast as the Bank of England hoped.

"Yet another depressing month," said Brian Hilliard, economist at Société Générale.

"This increases the unpleasant position the Bank is in. Inflation will come down, but it's a slow and painful process."

The Bank expects inflation to fall back to the 2% target, but the VAT increase from 17.5% to 20% next year looks set to delay the process.

Sentance last month became the first member of the MPC to vote for higher rates since August 2008, but was outnumbered by the rest of the committee.

Business leaders and economists urged the MPC not to follow Sentance's lead.

David Kern, chief economist at the British Chambers of Commerce, said: "It would be a mistake to overreact by raising interest rates.

"If the MPC were to consider raising interest rates in these circumstances, risks of a double-dip recession would increase. We urge the MPC to persevere with the current approach."