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Market Watch: Interest rates - Time to rise?
25 August 2010
Andrew Sentance is the lone voice in the Monetary Policy Committee (MPC) calling for interest rates to rise. What are the advantages and disadvantages of raising rates and should it happen now? Paul Samter, economist for the CML After experiencing the most severe recession in living memory, record low official interest rates have cushioned many from the worst effects. Low rates have helped many mortgage borrowers who might otherwise have struggled to keep on top of their finances. But as the economy begins to recover, focus inevitably shifts to when the Bank of England will start to withdraw this stimulus and return monetary policy to more normal levels. Inflation has remained stubbornly above the 2% target, and this clearly concerns some on the MPC. Understandably so, given the Bank's remit is to meet this target in the medium term. Headline inflation is expected to remain above target for some time, boosted early next year by the VAT rise. A move now would be seen as a sign that the Bank remains focused on meeting the target and is prepared to take action to do so. A rise would be expected to subdue demand a little and reduce price pressures. But most on the MPC believe that underlying price pressures remain weak. The upcoming spending cuts mean that a strong recovery is far from secure. It seems highly unlikely that the economy will continue to grow at the pace it did in the second quarter. Potential public sector job losses, even against an improving private sector, mean that wage growth will likely remain subdued. This backdrop is also unlikely to generate further inflationary pressures. A rise in rates while the outlook is so uncertain and most of the risks are on the downside could be enough to push the recovery off track. Rates will inevitably have to rise at some point. But it is too early to be confident that the economy has enough traction to justify an increase now. Also answering on this week's Market Watch panel are: Fionnuala Earley, UK consumer economist for RBS Josh Miller, economist for the Royal Institution of Chartered Surveyors (RICS) Published by Mortgage Solutions
