Think tank urges central bank to keep interest rates low

| January 17, 2011 | 0 Comments

Influential think tank, the Ernst & Young Item Club, is urging the Bank of England not to be pressurised into lifting UK interest rates as it could threaten the economic recovery.

Interest rates have been at the historic low of 0.5% since March 2009 - when the economy was in the midst of recession.

Despite some business groups urging the bank to raise interest rates to combat stubbornly high inflation, the Ernst & Young Item Club believes the central bank should “hold its nerve” and keep interest rates on hold.

Peter Spencer, chief economic adviser to the Item Club, told the BBC: “If the Bank has been pushed into a rate rise this year it will find itself with a depressed economy, a low rate of inflation below target, and of course having to cut interest rates.”

One of the bank’s policy members, Andrew Sentance, has (for seven months now) voted for interest rates to be lifted from their current historic low to bring inflation down.

However, prior to last week’s rate-setting meeting, many economists agreed that an increase in interest rates now might be too late to combat inflation and might indicate a sense of panic from the central bank.

Consumer Price Inflation (CPI) rose to an annual rate of 3.3% in November, up from 3.2% in October.

The figure represents the highest since May 2010 and inflation has now been above its target for a year.

The recent hike in VAT from 17.5% to 20% is also expected to drive inflation up to around the 4% mark over the coming months. This would take inflation to double the Government’s target of 2%.

However, like many other leading business groups, the Item Club expects inflation to fall back towards its target in 2012.

Meanwhile, it expects the economy to grow by 2.3% this year, rising to 2.8% in 2012, driven by a stronger manufacturing sector.

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