Interest rates should remain at current level urge experts

Posted on January 17th, 2011 | Categories - News

An economics forecaster has warned that interest rates should remain low to help the UK economy make a full recovery from the recession.

The 0.5% interest rate should not be increased as a result of pressure from the prime minister.

The Bank of England should not raise interest rates, according to an economic advisory service.

Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club said the monetary policy committee should “hold its nerve [and leave rates at 0.5pc] until it is clear that the economy is taking the austerity programme in its stride and is making a full recovery“.

The comments came after the Prime Minister contributed to the current debate on the country’s inflation issues, which Mr Spencer described as “quite incredible and quite unprecedented”.

David Cameron said: “If you look at the recent [inflation] figures, they are concerning because they are well outside what the Bank is meant to deliver. Inflation is extremely harmful, it destroys people’s savings. We don’t want to go back to having an inflation problem as we had in the past”.

Despite the ITEM Club’s warnings, it expects GDP growth of 2.3% this year, rising to 2.8% in 2012, which is a more positive outlook than the figures revealed by consultancy firm Deloitte, which signals a growth of just 1.5%.

However, at the current moment the Consumer Prices Index stands at 3.3%, which is much higher than the government’s 2% target.

Mr Spencer said: “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. That would seriously damage its credibility”.