Raising rates in November will be a mistake, these economists have warned

 
Emma Haslett
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The squeeze on consumers is expected to ease next year (Source: Getty)

Raising interest rates before late 2018 will be a mistake, an influential group of economists has warned, following heavy hints from the Bank of England it is planning to hike rates in November.

The EY Item Club has warned the Bank's monetary policy committee (MPC) should keep interest rates on hold until late 2018 to avoid weakening the UK's "fragile economic outlook", it said today.

The group said the UK's economy will grow just 1.5 per cent this year and 1.4 per cent next year, although growth will gradually strengthen towards the end of next year. As business investment begins to pick up, growth will then rise to 1.8 per cent in 2019 and two per cent in 2020, it said.

November rate hike

In September Bank of England governor Mark Carney said the MPC will raise rates in the "coming months", although in an interview last week he declined to give further details, saying only that tolerance for high inflation has "diminished". Many economists have taken this to mean that a hike in November is likely.

However, Howard Archer, the EY Item Club's chief economist, said the MPC should wait to raise rates from their historic lows of 0.25 per cent.

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.

Mark Gregory, EY's chief economist, added that the outlook was brighter than expected.

"The economy has not fallen off a cliff as some forecasts around the impact of Brexit predicted, but growth is slow and the risks are weighted towards the downside, with Brexit and the labour market providing the most significant areas of uncertainty.

"It would be sensible for businesses to consider these risks as part of their planning, particularly given the potential for an adjustment period after Brexit while the economy comes to term with the changes."

Consumer spending

However, Archer added that a squeeze on consumers is likely to ease as wage growth begins to rise, while inflation dips.

"Pressure on purchasing power should increasingly ease as 2018 progresses, largely due to an expected retreat in inflation to two per cent by the end of the year. There is also likely to be a gradual pick-up in pay in both the private sector and the public sector.

"However, there is a risk that employment growth could lose momentum."

Tomorrow official figures are expected to show inflation has soared past three per cent.

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