Bank urged to 'hold nerve' on rates

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The Bank of England has been urged to hold its nerve over interest rates

Bank of England policymakers have been urged to hold their nerve on interest rates this week, despite continued inflationary pressures in the UK economy.

Most commentators think the Bank’s monetary policy committee will keep its base rate at 0.5%, although economists at JP Morgan think there is a 40% chance that members will act on borrowing costs for the first time in almost two years.

Last month’s meeting saw two of the nine members of the MPC vote to raise rates to 0.75%, and economists say more members may vote in favour of a hike this time after warnings that the Consumer Prices Index (CPI) measure of inflation could hit 5% in coming months.

But while a hike in interest rates could help bring inflation down it could also jeopardise the feeble economic recovery, which looks uncertain after GDP slumped by 0.5% in the final quarter of 2010, said economists.

David Kern, chief economist at the British Chambers of Commerce, said that an increase in CPI towards 4.5% is almost inevitable but called on the MPC to “hold its nerve” and freeze interest rates until at least the middle of the year.

He said: “The UK economy is still fragile. A premature increase in rates risks derailing the recovery and could be damaging.”

Speculation that an interest rate hike may be imminent is being stoked because the Committee will have sight of the latest quarterly inflation report, which will not be made public for another week.

The last five times the MPC has voted to change policy have all come when a quarterly inflationary report is due.

A rate rise could help savers but would be bad news for the 68% of homeowners with variable rate mortgages who could expect to see monthly repayments increase.

Howard Archer, chief economist at IHS Global Insight, said: “The MPC is currently negotiating a tortuous path between high and rising CPI on one side and faltering economic activity and serious growth headwinds on the other. We believe the odds still significantly favour the Bank of England holding fire on interest rates in the very near term. Nevertheless, it is far from inconceivable that the Bank of England could raise interest rates on Thursday.”

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