Bank's Sentance says market ignoring inflation risks

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - Interest rates are probably restrictive but market expectations of several more cuts seem to be ignoring upside risks to inflation, Bank of England policymaker Andrew Sentance told Reuters on Thursday.

In his first news agency interview since joining the MPC in October 2006, Sentance also said that while the fall in the pound increased upward pressure on prices, it could also help rebalance the economy.

So far, the economy was slowing much as expected and a cooling had been necessary, he said. "We were looking for a slowdown and the question for us is not is the economy slowing and should we react to it, the question is: is the economy slowing in the right way that is appropriate to keep inflation on track," he said at his BoE office.

Sentance has a reputation as something of a hawk, but he said he agreed with Governor Mervn King's assertion that current interest rates of 5.5 percent were bearing down on demand, suggesting he might back a February rate cut.

But he suggested market expectations for as many as four quarter-point reductions over 2008 may be overdone.

"It seems that expectations have been driven by a lot of news or fears on the real economy side and the financial markets but we've also had a lot of news on the inflation side as well and its important that people factor in both sides of the equation," he said.

Economists said the interview suggested policymakers were likely to take a more cautious approach to cutting rates than markets expected, despite widespread concern about the health of the global economy.

"A clear signal that the MPC is back on inflation red alert," said Alan Clarke, economist at BNP Paribas.