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Is Andrew Sentance right to call for base rates to rise?

MPC member Andrew Sentance has today reiterated his call for a gradual increase in UK base rates despite the fact that the UK government recently announced one of the largest ever budget spending cuts in living history. He has been calling for a 0.25% increase in UK base rates to 0.75% and a gradual increase in the short to medium term. But is Andrew Sentance calling this all wrong?

At the moment we have a double whammy of increased taxes and reduce government spending which could, if Andrew Sentance has his way, results in a triple whammy of increased taxes, reduced government spending and less fiscal stimulus for the UK economy. Surely this would be a recipe for disaster and potentially push the UK back towards recession?

While on the surface this would look like a very dangerous move at this point in the economic cycle we do have to appreciate the potential threat of inflation in the short to medium term. If UK base rates remain at 0.5% for the foreseeable future then there is a danger that "cheap money" could be abused and lead to artificially high demand for goods and services. This would be the nightmare scenario that Andrew Sentance has been warning about and could release inflation rise to very dangerous levels.

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