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Bank warned not to increase interest rates yet

Bank warned not to increase interest rates yet

Category: Economy

Updated: 18/04/2011
First Published: 18/04/2011

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 It is now over 6 months old so the content may be out of date.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 warned that increasing interest rates prematurely could have disastrous consequences.

The base rate has been pegged at the historic low of 0.5% for 25 months, although policymakers have disagreed about what should happen next to the measure.

Minutes for April's meeting will be released this Thursday and are expected to show at least two members of the Monetary Polity Committee (MPC) voted for rates to rise, while a vote for increasing the programme of quantitative easing could also be revealed.

Many economists and analysts think a 0.5% rise in rates could come as soon as May or June.

But the Ernst & Young ITEM Club has spoken out against such a move, warning that a rise before real evidence of a recovery could hamper the economy yet further.

The Bank has found itself under pressure to increase rates as a result of inflation, which at 4% is double the Government's target, but the forecasting group insists that inflation will ease of its own accord next year, once the effects of the VAT hike and other temporary measures have passed.

In addition, recent figures showed that a couple of rises in quick succession could push many homeowners into arrears, ultimately leading to the number of homes being repossessed rising.

Low interest rates have allowed many people to keep their mortgage payments down at a time when other costs have risen.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said a rate rise would be 'perverse' at this stage, merely adding to already intense pressure on UK consumers.

"Our forecast assumes that the MPC will keep interest rates on hold until November this year – when a revival should be evident," he added.

"The economy will be much stronger next year as inflation falls back and the consumer begins to enjoy the recovery."

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