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Bank warned over interest rate rise

Bank warned over interest rate rise

Category: Economy

Updated: 14/03/2011
First Published: 14/03/2011

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 It is now over 6 months old so the content may be out of date.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 not to increase the base rate of interest, with warnings that it could derail any growth prospects.

The likelihood of an impending increase in interest rates has risen in recent months against a backdrop of above target inflation.

It is thought that a rise could come as soon as next month or May.

In the Monetary Policy Committee's (MPC) February meeting, three of the nine members voted for rates to rise. Minutes from its March meeting will be released later this month.

However, the business organisation BDO has warned the Bank of England that a decision to increase rates could put the breaks on any meaningful recovery in the economy during the second half of 2011.

Research by BDO has found that while economic growth will remain weak in the first and second quarter of the year, the picture looks better for the second six months of the year.

But a rise in rates would 'put at risk an already fragile recovery,' said the firm.

"Tackling inflation is clearly at the top of the MPC's agenda but it could be a policy error to raise interest rates as early as April or May, as this could seriously derail growth prospects," Peter Hemington, partner, BDO LLP, commented.

"Although inflation is well above the Bank of England's 2% target, inflationary pressures are not currently feeding into wages, as the labour market has yet to show signs of a sustained recovery. The likelihood of a wage-price spiral therefore still remains relatively low despite recent commodity price increases.

"With growth forecasts remaining fragile for the next two quarters, attempts to tame inflation could push up the price of sterling and make exports less competitive, threatening what growth there is in sectors such as manufacturing.

"The MPC must hold its nerve, or risk scuppering recovery prospects."

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