The UK’s economic growth is “fragile” and so interest rates should not rise for at least a year, according to the EY Item club.
Big Four accountancy firm EY regularly produces forecasts from its ITEM (Independent Treasury Economic Model) club group of economists.
The group said the Bank of England should wait at least a year before moving interest rates up from the current 0.25 per cent record low level.
The ITEM club’s comments come in the context of recent meetings of the Bank of England’s Monetary Policy Committee (MPC) showing an increased appetite among policy makers to tighten monetary policy as inflation rises and economic growth remains intact.
Current consensus is that the Bank will raise interest rates modestly in November, by around 0.25 per cent, putting it back at the level it was prior to the EU referendum.
On 17 October, the September UK inflation figures will be published, with consensus forecasts expecting a rise in inflation above 3 per cent.
Howard Archer, chief economic adviser to the ITEM Club, said: “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."
The ITEM Club expect UK GDP growth to be 1.5 per cent this year, which is lower than the Bank Of England’s 2 per cent forecast, and 1.4 per cent next year.
The group said they expect inflation to drop back towards the 2 per cent target as the impact of sterling weakness drops from the data.
John Greenwood, senior economist at Invesco Perpetual said: “In response to the higher inflation rate the BoE had kept its settings unchanged since last August, viewing the inflation as imported and therefore not something that it could control. However, as the evidence of a domestic spending surge accumulated, the BoE has changed its attitude. The minutes of its September MPC meeting reported that a majority of members felt ‘some withdrawal of monetary stimulus was likely to be appropriate over the coming months’. This is a clear signal that an interest rate hike is coming, probably at the November meeting of the MPC.”
David.Thorpe@ftcom
