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Rise in interest rates could scupper the recovery

Raising interest rates over the next few months could scupper the recovery, according to a report.

The latest Business Trends report by accountants and business advisors BDO LLP said that growth prospects are expected to be low over the next two quarters but raising the interest rates could put at risk the already fragile economy.

With inflation currently at double the Back of England’s 2% target, many believe that this will put more pressure on the MPC to increase interest rates in April or May.

Peter Hemington, partner, BDO LLP said: “Tackling inflation is clearly at the top of the MPC’s agenda but it could be a policy error to raise interest rates as early as April or May, as this could seriously derail growth prospects.

“Although inflation is well above the Bank of England’s 2% target, inflationary pressures are not currently feeding into wages, as the labour market has yet to show signs of a sustained recovery. The likelihood of a wage-price spiral therefore still remains relatively low despite recent commodity price increases.

“With growth forecasts remaining fragile for the next two quarters, attempts to tame inflation could push up the price of sterling and make exports less competitive, threatening what growth there is in sectors such as manufacturing. The MPC must hold its nerve, or risk scuppering recovery prospects.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .