Bank's Sentance says weak pound boosting inflation risk

By Matt Falloon

LONDON (Reuters) - The pound is likely to remain weak for some time, driving up inflationary pressures and helping to cushion the economy against the credit crunch, Bank of England policymaker Andrew Sentance said on Wednesday.

But the economy needs to slow down significantly to help keep inflation in check and control inflation expectations and so-far muted wage demands, the Monetary Policy Committee hawk told a business audience in London.

"Could the weakness of sterling prove temporary and unwind quickly? This seems unlikely, and would not be a safe assumption for policy," said Sentance, one of two MPC members who opposed cutting interest rates earlier this month.

"The fall in the pound will aggravate the inflationary impulse coming through from higher global energy and commodity prices. At the same time, the fall in the pound will also provide some demand offset to the negative impact of the credit crunch and other financial market developments."

But in a question-and-answer session after his speech, Sentance cautioned: "I don't want to give the impression that I was overemphasising inflation pressures."

Even so, Sentance and his colleague Tim Besley clearly have reservations about easing policy too quickly at time when inflationary pressures are rising so strongly.

POUND WEIGHED DOWN

Sentance said market expectations of further interest rate cuts driven by fears over the economy were driving sterling lower, helping to unwind a "substantial part of the significant appreciation" in the late 1990s.