THE Bank of England will need to raise interest rates to 3.5 per cent by the end of next year if it is to preserve its inflation-fighting capabilities, the Organisation for Economic Cooperation and Development (OECD) warned yesterday.
The Paris-based think-tank, which represents 31 of the world’s developed economies, said: “The gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010.” It said that the process of normalisation of interest rates needs to start soon, but warned monetary policy should remain expansionary to support activity.
The OECD added that the new coalition government faced substantial challenges over fiscal decisions: “The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation, but a concrete and far-reaching consolidation plan needs to be announced upfront.”
High inflation and lingering effects from the credit crunch, together with fiscal tightening, will keep growth subdued in 2010. The recovery will gain speed in 2011 when consumption and investment start to grow more robustly.