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Bank urged to hold it's nerve on interest rates

Bank urged to hold it's nerve on interest rates

Category: Economy

Updated: 18/01/2011
First Published: 17/01/2011

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 It is now over 6 months old so the content may be out of date.

The Bank of England has been urged to hold its nerve on interest rates, despite the threat of rising inflation.

Last week, the Bank confirmed that the base rate would remain on hold at the historically low level of 0.5% for the twenty second month in succession.

The measure was originally cut in the midst of the recession in the hope that it would give the economy some much needed respite.

Views on when rates will start to rise again are mixed, although only one member, Andrew Sentance, of the Bank's Monetary Policy Committee (MPC) – the group which makes the decisions on rates –has voted to increase the interest rates.

There are fears, however, that increasing the base rate could push thousands of home owners into arrears or even see them lose their homes, as they would no longer be able to afford their mortgage repayments.

Ernst & Young has added its voice to the debate, calling for the Bank to stand firm on rates.

The firm has predicted that inflation could rise to 4% next month, way above the Government's long-term 2% target.

Such a spike would likely see the Bank come under pressure to increase interest rates to help curb the effects of sky-high inflation, although Ernst & Young has forecast that it will fall back to 2% in 2012 once temporary pressures fall out of the economy.

"It's going to be a tense start to 2011," Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club commented.

"The fiscal retrenchment will keep GDP subdued, while commodity price rises and the VAT hike will push inflation close to 4% and leave the MPC agonising over whether to increase the Bank base rate.

"However it's vital that the MPC stands firm. These are temporary pressures, domestic cost inflation remains low and CPI inflation will come back to heel in 2012 once the VAT increase falls out of the figures next January.

"A premature rate rise would boost the pound, weakening the UK's ability to increase its exports – particularly into the emerging markets – which we have long maintained hold the key to the UK's economic recovery."

The accountancy firm has also predicted that the economy will grow by 2.3% this year, followed by a 2.8% expansion in 2012.

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