Pressure likely to increase on Bank over interest rates Go compare with our comparison table

Pressure likely to increase on Bank over interest rates

14 January 2011 / by Paul Dicken

The Bank of England is likely to come under increasing pressure in coming months to raise interest rates, especially if inflation remains high, following its decision to maintain the Bank Rate at 0.5 per cent.

The Monetary Policy Committee (MPC) at the Bank voted on 13 January to keep the monetary policy levers as they were, with the official interest rate left at its ultra low level of 0.5 per cent and no further quantitative easing (economic stimulus measure) launched.

The decision did receive support despite comments suggesting the Bank was losing credibility by keeping rates so low in the face of persistent inflation significantly above the 2 per cent target.

Economic adviser to the Ernst & Young ITEM Club, the economic forecaster, said: “We agree with the MPC’s decision to keep monetary policy unchanged. High inflation is primarily being driven by temporary factors while underlying price pressures remain low.

“Despite the mounting pressure of losing face due to stubbornly high levels of inflation that have consistently been overshooting the Bank’s forecasts, we believe the MPC’s decision to keep monetary policy unchanged is sound.”

In a column published on 14 January, the Guardian’s economics editor Larry Elliott urged Bank of England Governor Mervyn King to hold his nerve in the face of pressure. Once rates start to go up consumers and business will expect a gradual increase until they reach a more normal level close to five per cent, Elliott argues.

“The result would be a collapse in confidence as debts become more expensive to service. Unemployment would rise, growth would tank, the budget deficit would increase rather than fall,” he added.

Chief economic adviser to the Confederation of British Industry, Ian McCafferty, said: “The Bank is grappling with the need to balance the two conflicting issues of inflation and growth. While this hold announcement is not a surprise, decisions in the coming months will be more difficult as the Bank’s anti-inflation credibility comes under greater pressure.”

Before the 13 January announcement Dr Ros Altmann, director general of Saga, a provider of services for older people, called on the MPC to raise interest rates.

She said those living on fixed incomes or living off income from their savings were suffering the effects of the persistently higher inflation.

“Even if the economy weakens a little this year, the dangers of ‘stagflation’ – where inflation stays high despite sluggish growth – should not be ignored,” Altmann said.

Dr Altmann renewed her call for the government to issue inflation-linked bond certificates for over-50s to protect those coming up to retirement from having their future income eroded by inflation.

She said the interest rate being paid on UK government gilts (bonds) was too low and not rewarding investors, warning this could prompt a sell-off in gilts if rates don’t rise.

© Fair Investment Company Ltd