BOE's Sentance Says U.K. May Already Be in Recession

By Jennifer Ryan and Brian Swint

Oct. 13 (Bloomberg) -- Bank of England policy maker Andrew Sentance said the U.K. economy may already be in a recession and inflation may slow below the central bank's 2 percent target, suggesting he may vote to cut the benchmark interest rate.

``It now seems to me more likely than not that we will see a fall in gross domestic product for the third and fourth quarters of this year,'' Sentance said in the text of a speech prepared for delivery today in London. Inflation ``could quite conceivably undershoot the target for a while.''

The Bank of England last week cut its benchmark rate by half a percentage point in tandem with other central banks around the world, a move that reflected a shift in prospects for U.K. inflation, he said. The central bank today said it would take part in a joint effort to flood markets with dollars to revive confidence in the banking system.

Inflation, which accelerated to 4.7 percent in August, may rise above 5 percent in coming months before receding, he said.

``We can now be much more confident than we were a few months ago that inflation will come back to the 2 percent target,'' said Sentance, who voted against a rate cut in April. There is now a higher risk of a ``prolonged and severe period of falling demand and output.''

Sentance voted in a minority to increase interest rates in five meetings since joining the Monetary Policy Committee in October 2006. He dissented to the April decision to lower the benchmark to 5 percent, favoring an unchanged rate.

Interest Rates

His label by media and commentators as a ``hawk'' who prefers higher interest rates was applied ``in a very different world to the one which we currently inhabit,'' he said. He said he agreed with a statement attributed to John Maynard Keynes, that ``When the facts change, I change my mind.''

Citigroup Inc. economist Michael Saunders last week said the central bank may make another emergency rate reduction before the next meeting on Nov. 6. Howard Archer, chief European economist at Global Insight Inc. in London, said today he saw scope for further coordinated central-bank rate cuts.

Last week's joint action, the first since the aftermath of the terrorist attacks in September 2001, showed ``our flexibility to act when the situation demands a response,'' Sentance said. ``The committee acted independently and under the terms of its legal mandate.'' Minutes of the Oct. 8 decision are due on Oct. 22.

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.netBrian Swint in London at bswint@bloomberg.net