Interest rate rise should be delayed, EY Item Club says

Release time:  2017-10-16 Release source:  BBC Business author:  ADNose browse:  104

The Bank of England should hold off from raising interest rates next month, according to a forecasting body.

Bank Governor Mark Carney said rates could go up in the "relatively near term", with many analysts expecting a hike in November.

However, EY Item Club said such a move risked hurting the UK's "fragile economic outlook".

The group called on the bank to wait another year before raising the benchmark rate from 0.25% to 0.5%.

It comes after the British Chambers of Commerce and ratings agency Standard & Poor's suggested economic growth was not strong enough to warrant a rate rise.

EY Item Club, which uses the treasury's forecasting model, predicted GDP growth would slow to 1.5% this year and 1.4% in 2018.

'Stronger footing'

It said expectations were high that the Bank's Monetary Policy Committee (MPC) would raise rates at the next meeting on 2 November, but urged it to wait for the economy to pick up.

  • UK economy 'growing at muted rate'

  • Service sector recovers from 11-month low

"While it is understandable that the MPC will want to gradually normalise interest rates from their current 'emergency levels', we believe it would be better to do so once the economy is on a stronger footing," said Howard Archer, chief economic advisor to the EY Item Club.

The last time rates were raised was July 2007, before the financial crisis. Since then interest rates have been kept low to boost the economy by keeping the cost of borrowing down.

The Bank cut rates further - from 0.5% to a record low of 0.25% - after the Brexit vote in a move designed to stimulate the economy.

Recent low unemployment figures and stronger inflation have made a rise in rates more likely.

Mr Carney told the BBC at the end of September: "If the economy continues on the track that it's been on, and all indications are that it is, in the relatively near term we can expect that interest rates will increase."

Consumer squeeze

The Bank is tasked with using interest rates to keep inflation at 2%. It is currently at 2.9%, with the latest figures due out on Tuesday.

But according to EY Item Club's forecasts, inflation will fall back to 2% by the end of next year as the effects of the weaker pound wear off.

The forecasting group said consumer spending would slow from a nine-year high in 2016 - 2.8% - to 1.5% this year due to inflation, low wage rises, welfare cuts and a slow housing market.

The latest retail industry figures, released last Monday, indicate footfall fell by 1.2% in September.

Helen Dickinson, chief executive of the British Retail Consortium, said: "For the third consecutive month, most shopping destinations suffered a decline."

The British Chambers of Commerce said on Friday it was "extraordinary" the Bank was considering a rate rise when economic growth was muted.

Earlier this month, Standard & Poor's said it was "a bit sceptical" the UK economy needed an interest rate rise.

However, others have argued the economy is strong enough to start moving off the emergency rates.