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OECD: Bank of England should lift interest rates

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by Kay Mitchell

The Paris-based Organisation for Economic Cooperation and Development (OECD) has today said the Bank of England should lift interest rates to combat stubbornly high inflation.

UK economic growth is being hampered by soaring inflation, which is having a major impact on consumer spending.

As a result, the Organisation revised its growth forecasts for the UK, expecting growth to be 1.4% in 2011, lower than the 1.5% forecast in March.

Meanwhile, the OECD said UK inflation will remain above 4% this year and return to its 2% target by 2012 – in line with the Bank of England’s forecast.

It said: “A modest increase in interest rates should be taken during 2011 to stave off increases in inflation expectations, which are already elevated.”

Interest rates have now been at the historically low level of 0.5% since March 2009 – when the economy was in the midst of recession.

The comments come after one of the Bank’s policymakers, Andrew Sentance, continued his argument for higher interest rates.

Mr Sentance reiterated that the bank faces losing its credibility if it is not seen to be fighting inflation.

In his final public speech before leaving the Monetary Policy Committee at the end of this month, Sentance said monetary policy should be tightened.

He has voted for higher interest rates since last June.

“Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting,” Sentance said in Jersey today.

Last month, inflation reached a 2½- year high of 4.5% – more than double the target.

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News posted: May 25, 2011

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