The Bank of England is being warned by economists and politicians that raising rates too early will kill off any recovery.


According to the Guardian the Ernst and Young Item Club will say this week that raising the base rate too early might hit UK manufacturing confidence.

As Lord Oakeshott, the LibDem Treasury spokesman said last night, the rates have been kept 'artificially' low up until now and the Bank of England (BoE) is basically walking a tightrope regarding interest rates.

Although David Cameron has called the pressure of low returns for savers due to high inflation extremely harmful he will also be acutely aware of the fall out on borrowers (and government popularity) of any rate rise.

With commodity price rises and tax increases hitting the high street in a double whammy for consumers the government and BoE are caught firmly between the proverbial rock and hard place.

There is a hope, somewhat backed by the Item Club's thoughts that inflation will fall back once 'temporary pressures' have abated, that inflation will somehow sort itself out. So no action need be taken by the BoE Monetary Policy Committee to raise rates goes the thinking.

As the Guardian article points out, Brent crude has gone up by about 36% to £62 a barrel, metals like copper have gone up in price, coffee is up 25% and cotton by 30%. Staple items like wheat and soya have also gone up. All in the last 3 months or so. For these not to have a lasting effect they will have to fall back quickly to previous levels.

With all these price and tax hikes it is clear that the inflation of the prices of basic goods will continue to rise. And it is not just VAT, National Insurance Contribution rates are due to go up too remember, the good news being that the personal allowance goes up by £1,000. But as the amount of disposable income decreases there will be a corresponding and adverse effect on the sales of big ticket and non-essential items. Without a recovery this could lead to huge discounts of these items and a few companies falling by the wayside too.

Although the BoE has pumped liquidity into the UK system with QE they have not printed enough (yet) to bring about hyper-inflation. So it is hard to see a future of people queueing up for bread with million pound banknotes or of children using rolls of tenners as toys.

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