BoE forecast to raise interest rate
LONDON: The Bank of England will start raising interest rates within six months to curb inflation, the Confederation of British Industry said. The Monetary Policy Committee will increase its benchmark interest rate by a quarter-point every three months from the second quarter of 2011 until mid-2012, the London-based group said in a report today. It will then step up the pace of increases to end that year with a rate of 2.75 percent.
"The persistent strength of energy and commodity prices is a growing concern, as it is likely to mean that inflation does not fall back quite as sharply as many hope," said CBI Chief Economic Adviser Ian McCafferty. "Growth at the start of 2011 is likely to be very sluggish, although we do expect the recovery itself to stay on track."
Bank of England policy makers remain divided over the need to curb inflation or increase bond purchases to counteract the effect on the economy of the government's fiscal squeeze. Inflation accelerated to 3.3 percent in November, surpassing the government's 3 percent limit for a ninth month. Consumer-price growth will "significantly exceed" the central bank's 2 percent target next year and only fall "just below" the goal in the first quarter of 2012, the CBI forecast. Inflation will end 2012 at 2.4 percent, it said.
The CBI said the economy will grow 0.6 percent in the current quarter before slowing to 0.2 percent in the first three months of 2011. Growth will average 2 percent in 2011, it said, maintaining a September prediction, and accelerate to 2.4 percent in 2012. It also forecasts house prices will fall about 4 percent next year and remain unchanged in 2012.
The Bank of England left its emergency bond-purchase plan unchanged at 200 billion pounds ($310 billion) this month and kept the benchmark rate at a record low 0.5 percent.
MPC member Adam Posen, who has called for the bank to increase stimulus, said last week policy makers shouldn't "overreact" to inflation, as it may slow below 1 percent in two years. -PB News