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May 27, 2011    

Policymaker against lifting interest rates

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by Kay Murchie

Bank of England policymaker Adam Posen today said the central bank is right not to have raised interest rates, despite stubbornly high inflation.

For several months, three of Monetary Policy Committee (MPC) members have voted for interest rates to be lifted after inflation reached a 2½- year high last month of 4.5% – more than double the target.

His comments in the Financial Times come shortly after the Paris-based Organisation for Economic Cooperation and Development (OECD) said the Bank of England should lift interest rates to curb inflation.

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

In March, Posen said he believed inflation will plunge to 1.5% by the middle of next year. The American economist is so certain of his prediction that, at the time, he threatened to step down from the Committee, when his three-year term ends in August 2012, if his forecast is wrong.

Many economists do not expect inflation to fall back to target until late 2012.

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.

Earlier this week, 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.

Meanwhile, returning to Mr Posen, he said: “Setting monetary policy in response to short-term commodity price gyrations would only destabilise the UK economy and create greater uncertainty about future inflation.”

Mr Posen continues to be a lone voice on the nine-strong committee calling for an injection of £50 billion via the Quantitative Easing (QE) scheme to boost the economy.

He has voted for the QE scheme to be re-started since last October.

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