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Could base rate rise this week?

Could base rate rise this week?

Category: Business

Updated: 07/02/2011
First Published: 07/02/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Economists who attempt to second guess the Bank of England and its decisions on the base rate of interest have suggested that the rate needs to increase this week.

The Shadow Monetary Policy Committee (SMPC) has voted by five votes to four to raise base rate to 1% this month.

With the actual Bank of England Monetary Policy Committee (MPC) due to announce its latest rate setting decision on Thursday, the majority of the group of senior economists who constitute the SMPC voted in favour of a rise in rates.

The other four members of the committee all voted to hold the rate at 0.5%, the record low level at which it has been pegged since March 2009.

The fact that inflation is persistently overshooting the 2% consumer prices index inflation target, and the view that the global economy is closer to overheating rather than depression, were amongst the reasons given for wanting to increase the rate.

The depreciation of sterling was also argued to be a good reason to hike the rate.

On the other side of the coin, the possible derailment of an 'anaemic' economic recovery was cited as the main reason not to raise rates.

Concern was also expressed that the UK banking system was so fragile that it would be incapable of generating sufficient money and credit to support the recovery if the official rate went up.

It was also feared that the hike in Value Added Tax to 20% would squeeze living standards even further, leaving consumers with less money in their pockets to spend on the high street.

A group of senior economists founded the SMPC in 1997 to debate the policy decisions of the MPC.

Savers who have struggled to find a decent rate of return over the past couple of years will have their fingers crossed that the actual MPC follows the cue of its shadow counterpart, while mortgage borrowers will be just as hopeful that things remain as they are.

Last week, the British Chambers of Commerce (BCC) warned that the base rate should remain unchanged for the foreseeable future.

"The UK recovery is still fragile and the more forceful implementation of the Government's austerity plan will inevitably have negative effects on business cashflows and consumer disposable incomes," said David Kerns, chief economist at the BCC.

"While we support the Government's continued deficit cutting programme, we believe it is important to ensure that the recovery continues and there are no setbacks.

"The MPC must keep interest rates low for some time, and the Government on its part must make it possible for businesses to increase jobs, export and invest."

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