The OECD has produced a report suggesting interest rates in the UK may have to rise to 3.5% by the end of 2011. They argue that rising inflation (3.7%) and improved prospects for growth mean the Bank may have to act soon in order to prevent inflationary pressure. They argue rates will have to rise by end of the year at the latest in order to maintain credibility.
“The gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010.” (UK to raise rates)
However, I don’t agree with the OECD report, nor do the Bank of England.
- The spike in inflation is driven by short term factors such as rising petrol and food prices. (remember the oil price induced inflation spike of 5% just before the 2008 recession.
- The OECD have improved the UK’s growth prospects but global growth prospects still look shaky due to problems in Europe and the continued weakness of banking sector.
- Fiscal Policies. The government are committed to making a dint in the size of government borrowing. This will involve higher taxes and cuts in spending. Wage freezes and spending cuts will all help to reduce aggregate demand and economic growth. Therefore, with fiscal tightening it is important monetary policy remains loose to boost spending.
- The US, Europe and Japan all face very low inflation rates with prospect of deflation, if recovery isn’t boosted.
2011 is still a long way off, and it is hard to make predictions for the state of growth, inflation and interest rates. We hope, growth will be sufficiently strong in 2011 to allow some interest rate rises. But, at the moment, there is no pressing need to raise rates because of the high unemployment, fragile recovery and fiscal changes.
Related
I think rates will begin to rise by the end of the 2010, in line with the current consensus for Bank of England Base Rates
I predict the interest rates will rise in the first quarter of 2011.