Banks key to house market recovery – MPC official

The pound rallied after the speech where Sentance hinted that the Bank of England Monetary Policy Committee (MPC) would be set to tighten up policy.

"Through the recession, the MPC had been right to relax monetary policy aggressively to provide support for a recovery which is now emerging. But as the recovery develops, the economic situation will change and the MPC must be ready to adapt its policies to the changing economic situation over the course of the recovery – just as we have done through the recession," he said.

He told delegates the recovery would have to fight through cuts in public spending resembling 1990s levels and the banking recovery. The deficit widened to £15.7billions in December, the most for that month since records began in 1993.

Sentance added that the recovery "started earlier and may have been stronger" than indicated by the Office for National Statistics’s GDP figures which this week showed the economy had grown by 0.1% in the fourth quarter of last year, ending the six-quarter recession. The figure however, was less than almost any economist had predicted.

While the two main political parties have been split over the timing of cuts which are widely accepted on both sides, he implied that the pace and scale of cuts would have an important bearing in interest rate policy.

"There is a risk that fiscal policy is tightened more aggressively after the election," Sentance said, "or that the sheer scale of the deficit acts as a bigger drag on private spending, because of the fear of future tax rises and/or spending cuts. However, these concerns should not be overplayed."

The worst of the employment problem had also passed, Sentance said: "Business surveys suggest that the margin of spare capacity within firms is not as high as we might expect. There may be less labour market slack at present than at the equivalent stage of the early 1980s and early 1990s recoveries."

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