The influential Ernst & Young Item Club has suggested that the Bank of England keeps interest rates low in order to maintain economic recovery.
In their latest forecast, the Item Club is telling the Bank to “hold its nerve” and avoid pressure to raise interest rates in 2011.
They say that increasing interest rates from the current historic low of 0.5% could put UK economic recovery at risk.
Speaking to the BBC, Peter Spencer, chief economic adviser to the Item Club, has outlined what he believes would be the consequences of an early rate rise.
He describes a scenario where we have a depressed economy, inflation below target and then a need to cut interest rates again. Doing this would damage the credibility of the Bank of England.
We agree with this assessment and the recommendations from the Item Club.
It is important that the Bank avoids an interest rate rise during 2011, regardless of what price inflation figures appear to be doing as a result of temporary measures. UK economic recovery would be hurt by a rate rise this year.
Recovery is currently being supported by consumer spending which is only made possible by low interest rates giving households more disposable income. A rate rise combined with spending cuts and higher taxes would leave little money available to help with economic recovery.
Photo credit: Flickr/Tilemahos Efthimiadis
