Dated: 4 May 2011
Commenting in advance of tomorrow’s MPC decision, Graeme Leach, Chief Economist at the Institute of Directors said:
“We do not see any need at present to raise interest rates. A rate rise would do more harm than good. The source of inflationary pressure in the UK is either fiscal (higher VAT) or global (commodity and oil prices), and so a rate rise would do little to alleviate these pressures.
“Even though inflation could edge higher in the near term, the MPC needs to hold its nerve, confident that the headline CPI will fall sharply in 2012. Indeed, the lag in the policy response means that rate rises now would only begin to take full effect just as the headline rate begins to fall from VAT effects. The end result might then be an undershoot in inflation below the 2 per cent target in 2012-13.
He added:
“The elephant at the table remains weak broad money supply. With continued de-leveraging across the banking system it will be an uphill battle to expand the money supply over the coming years. Raising interest rates now would only make matters worse”.
