March 19, 2010 / 7:50 AM / 8 years ago

Bank's Sentance sees some risk of double-dip

LONDON (Reuters) - Bank of England policymaker Andrew Sentance said he saw encouraging signs of a pick up in the UK and the world economy, but warned that there was still a risk that a financial shock could derail the recovery.

Andrew Sentance, Member of the Monetary Policy Committee, is pictured in this file photo. REUTERS/handout

In an interview with CNBC broadcast on Friday, which largely reiterated a speech he gave on Thursday, Sentance said he expected inflation in Britain to fall back to the central bank’s 2 percent target, or below, helped by muted wage growth.

“I’ve been relatively encouraged by the turnaround we’ve seen in the last year, both in the UK and in the global economy,” Sentance said.

“You have to recognise there is some risk of a double dip, but that’s not the central forecast. You’d have to see some factors bring that about: we’ve seen big shocks in the international economy over the last couple of years, so you couldn’t rule out some new shocks emerging on the financial front which could set back the economy.

“But that’s not my central expectation.”

Britain emerged from recession at the end of 2009, but policymakers have warned that the recovery is fragile and likely to suffer setbacks due to the unusually harsh winter and poor growth in its main trading partners.

The economy expanded by 0.3 percent between October and December last year, but unexpectedly weak retail sales, manufacturing and trade data for January have cast doubt on the prospects for growth in the first quarter of this year.

Such concerns were behind the BoE’s unanimous vote this month to leave interest rates at 0.5 percent — where they have been since March 2009 — and to keep its stock of asset purchases under quantitative easing at 200 billion pounds.

INFLATION TO EASE

Few economists expect the central bank to begin raising interest rates before late this year, though much depends on how aggressively the new government to be elected in May or June this year decides to tackle a record budget deficit.

Sentance noted that a “substantial fiscal tightening” would be needed as the recovery gathered pace. In his speech on Thursday, he had said that monetary policy would be able to offset some of the pain of government spending cuts.

He expects inflation, which hit a 14-month high of 3.5 percent in January, to eventually fall back to target, although there were some puzzles why it had not responded more to the recession.

“We understand the reasons why that (the rise) is: it’s partly to do with the pound and the impact that’s had on prices,” Sentence said, adding that oil prices were also having an effect.

“As those things begin to drop out of the calculation, some of the other things that been affected by the recession, such as wage growth, will bring inflation down to target and possibly below it.”

Editing by Jan Dahinten

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