Experts split on dangers of hike in interest rates

AS the Bank of England’s Monetary Policy Committee (MPC) looks set to keep interest rates at 0.5 per cent for another month, economists are divided on when the loose monetary policy should finally be tightened.

There is increasing pressure to raise interest rates for the first time since March 2009 to try and halt inflation, which currently stands at 3.2 per cent, after GDP growth rose to 1.1 per cent in the second quarter.

The Bank’s governor, Mervyn King, told the House of Commons last week that inflation is set to be above the MPC’s target of 2 per cent for most of next year, prompting fears of an inflationary crisis.

Last month MPC member Andrew Sentance broke from the consensus and voted for a 0.25 per cent rise in interest rates, and this month he could be joined by other members, starting a move towards a rise of some sort within 2010.

But others are warning the government’s planned spending cuts and the weakness of the Eurozone will halt Britain’s GDP growth, and therefore a rise in interest rates now could cause a period of “stagflation”, where inflationary prices and negligible GDP growth beset an economy at the same time.