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Interest rate hike could hurt 'fragile' economy

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The Bank of England should hold back on raising interest rates until the UK’s economic prospects look brighter, according to an influential forecasting body.

The EY ITEM Club argued that with growth set to remain stuck in low gear for the rest of this year and into 2018, policymakers should avoid a hike that risks weakening the “fragile” outlook.
It also said the economy’s performance further ahead depended critically on the UK reaching a transition deal with the EU.
The report comes amid growing expectations that the Bank of England could raise rates next month after a cut to 0.25% last summer following the Brexit vote.
Inflation figures due out on Tuesday could add to the pressure on the Bank’s Monetary Policy Committee (MPC) to act if, as expected, the rise in the cost of living climbs to 3%.

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The EY ITEM Club is the latest body to warn against a hike. Last week, the British Chambers of Commerce said it was “extraordinary” that the Bank was considering such a move amid tough economic conditions and Brexit uncertainty.
In its autumn forecast, the body – which uses the Treasury’s model for the UK economy – said GDP growth would be limited to 1.5% in 2017 and 1.4% next year.
The figures represented no change on its previous outlook for this year, and a slight upgrade to its previous forecast for 2018.
“However with expectations high that interest rates may rise from 0.25% to 0.5% this November, the EY ITEM Club is urging the MPC to wait until the UK’s economic prospects look brighter and there is greater certainty over the Brexit transition arrangements,” the report said.

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A key argument for hiking interest rates would be to curb inflation, which has been climbing largely thanks to the fall in the pound since the Brexit vote – which makes imports more expensive.
But Howard Archer, chief economic adviser to the EY ITEM Club, argued that inflation would fall back markedly through next year as the impact of sterling’s drop fades.
He added: “We are far from convinced that raising interest rates this year is the recommended course of action.
“While it is understandable that the MPC will want to gradually normalise interest rates from their current ’emergency levels’, we believe it would be better to do so once the economy is on a stronger footing.”

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The forecast expects a sharp slowdown in consumer spending growth this year and an even more muted picture for 2018.
Mr Archer said the next few months should bring greater clarity on the Brexit transition deal, but this “continues to be the number one risk, in addition to ongoing political uncertainty”.
Separately, a report from the British Retail Consortium (BRC) showed visits to shops continued to decline in September, dropping 1.2% compared with the same month last year.

Source: SKY