Rate rises to reign in UK economy

The Bank of England has been urged to raise interest rates up to three times by the end of next year, to avoid damaging the UK economy through inflationary pressures.

The Orgainisation for Economic Co-operation and Development says the Bank's main rate should reach 5.75% unless there is a "spontaneous rise" in taxes or a cut in public spending.

In the group's half-yearly report, it found that low inflation and a slowdown in the economy should be kept in check by a hike in the base rate, beyond its current 4.75 per cent.

This contradicts predictions from most analysts, who argue only one more increase from the Bank is likely, given the City consensus that rates have now peaked.

Evidence from the OECD did suggest action from the MPC could however be averted, if the Treasury was right in their claim that the UK is 1 per cent under capacity.

"The slowdown and continuing low inflation warrant a pause in monetary tightening, although further tightening may be needed during 2005, in particular due to increasing pressures from the labour market," it said.

Inflationary and wage pressures into next year has also prompted Mervyn King, Governor of the Bank of England, to recognise the economy is operating close to capacity.

As a result, he said it was vital Gordon Brown can meet his golden rule on finances, which agrees to borrow only to fund investments in the long term, rather than short-term spending.

Mr King said such tight fiscal policy was not an "optional extra, but an integral part of the macro-economic framework."

He added the Chancellor would agree with the importance of the Exchequer's own self-imposed borrowing rules.

However, the BoE governor did emphasize the economy was not facing an economic crisis by highlighting the slight pick up in the housing market.

Figures from the Nationwide building society reveal house prices in November reversed the slump on the market and actually rose by 1 per cent.

The Bank said good levels of consumer spending combined with positive signs from business surveys and reports showed a more positive picture of things to come.

This was supported from OECD evidence showing the UK economy was not slowing but in fact deserved a better monetary outlook.

They have now upgraded the country's estimate for growth by 0.1 per cent to 3.2 per cent for the year. Estimate for 2005 have been cut by the same amount to 2.6per cent.

 

2nd December 2004

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