Divisions over interest rates set to widen

Julian Harris
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THE Bank of England announces its latest decision on interest rates today, amid growing disagreement between economists and business groups.

The Confederation for British Industry (CBI) endorsed a tightening of policy this week, despite contrary statements from other business groups.

“We must not allow inflation to get back into the national psyche as a given,” said CBI chief John Cridland.

“I don’t think a modest increase in interest rates would destabilise an export-led recovery,” Cridland added.

But yesterday the Institute of Directors (IoD) and British Chambers of Commerce (BCC) both reiterated their opposition to a rise in rates.

“Be afraid, be very afraid,” said IoD economist Graeme Leach. “There is a very real possibility interest rates could rise at this month’s monetary policy committee, with the decision on a knife edge.”

“We are very concerned that hiking interest rates at such a time could further undermine the recovery,” Leach said.

Markets expect rates to exceed two per cent next year, yet economist Tim Drayson at Legal and General Investment Management yesterday argued that the Bank rate could be stuck at one per cent throughout next year.

“It’s likely any increase in rates will cause growth to slow more than the government expects,” he said. “This will surely convince the MPC to halt any further rate.”

This month all eyes will be on internal Bank members Charles Bean and Paul Tucker, thought to be next in line to join the hawks voting for a rate rise.

After the Bank’s decision, announced today, the members’ individual votes are revealed in the minutes of the meeting published on 23 March.

Last month Spencer Dale joined Martin Weale in voting for higher rates with a 0.25 per cent rise in rates, while chief hawk Andrew Sentance upped his vote to a 0.5 per cent hike.