InvestmentsNov 28 2017

OECD warns Bank of England against further rate rises

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OECD warns Bank of England against further rate rises

The Bank of England should be wary about putting interest rates up further from here, according to analysts at the Organisation for European Co-operation and Development (OECD), as consumer spending weakens and unemployment rises.

The international body warned that the current 3 per cent inflation rate is likely to lead to lower consumer spending, which weakens economic growth, and it is likely that unemployment, currently at 4.3 per cent, will rise.

Both the Bank of England and the Office for Budget Responsibility (OBR) believe the inflation rate will peak at around the current 3 per cent level this year, and then drop in 2018 back towards the target rate of 2 per cent.

The current rate of unemployment, at 4.3 per cent, is lower than the Bank of England’s own definition of “full employment.”

When it raised interest rates in November, the central bank said its role is to find a balance between controlling inflation and ensuring there is sufficient stimulus in the economy to aid economic growth.

The Monetary Policy Committee (MPC) of the Bank of England, which is the body that sets interest rates, said it felt the balance had shifted towards withdrawing stimulus, which is what an interest rate rise does, in order to put downward pressure on inflation.

But the OECD report said: “Monetary and fiscal policies need to remain accommodative [low interest rates]. Inflation has risen to 3 per cent, but in the absence of wage pressures the central bank should look through the temporary inflationary impact of currency depreciation.”

The organisation said government spending is due to be cut by 1 per cent in 2018 and 2019, which will have only a moderate effect on the levels of economic growth, but such is the capacity for Brexit to cause further shocks to the economy, the government should “stand ready” to alter this course and add stimulus to the economy via increased spending.

David.Thorpe@ft.com