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Daily View: Inflation and interest rate predictions

Clare Spencer | 10:08 UK time, Wednesday, 19 January 2011

After a rise in prices recorded in the consumer price index, commentators make their suggestion as to what the Bank of England should do about interest rates.

The the increase in inflation could be a temporary phenomenon:

"Unless retailers are able to pass on increases in costs to their customers and workers are able to secure higher pay deals to compensate for rising prices, the expectation is that inflation will fall back below the government's 2% target in 2012.
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"This is still a defensible argument, despite today's figures. There seems little likelihood, with the labour market weak, that unions are going to be able to negotiate pay deals of 4% over the coming months, and unless they do the impact of a rising cost of living will be deflationary rather than inflationary, through its impact on the spending power of consumers. Taxes are rising and public spending is being squeezed, so the Bank will be worried - quite rightly - that putting up interest rates will amount to overkill."

Conservative MP that the Bank of England are unlikely to increase interest rates despite inflation:

"So the story of 2011 as the year unfolds will almost certainly be one of a rapid rise in the cost of living as both global commodity prices and taxation spike upwards. The cost of oil has been highly volatile in recent years, but the 50% rise in price over the past six months may prove more difficult to reverse. The exponential growth in demand from emerging economies (also affecting copper, steel, cotton etc.) may be compounded if political unrest in the Arab world spreads beyond Tunisia. Then there is a global shortage of wheat as a result of failed harvests in eastern Asia, whilst the effect, for example, of the Queensland floods on the price of iron ore, coal and other minerals will only be clear in the months ahead.
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"This impact will be compounded if interest (and mortgage) rates were to rise to 'proper' levels. Understandably policymakers are fearful both of stoking up inflationary expectations or choking off early signs of sustainable economic recovery if they raise interest rates."

as a response is that the one thing he is not convinced with is the idea there can be a genuine trade off between inflation and growth:

"In the short term, yes, the price of dealing with inflation might be slower GDP growth, or even contraction. But if the result of prolonged easy money is to stop the economy adjusting, to prevent markets realigning with changed consumer preferences, and to hold off indefinitely the necessary deleveraging, then it's hard to see where real, sustainable growth is going to come from."

that the Bank of England should reserve judgment in interest rates until autumn:

"These inflation figures are awful. Not only is the headline rate higher than the City expected, it is substantially higher. Worse still, the figures take no account of the recent rise in VAT, which could push the headline rate to twice the Bank of England's target... With growth already flagging and public spending cuts looming, an increase [in interest rates] now would threaten the recovery. It would be far more sensible for the Bank to wait until the autumn, when it can more accurately assess how the economy has responded to the Government's fiscal austerity programme."

The the Bank of England to hold its nerve and resist from raising interest rates:

"The temptation for Mr King and the Monetary Policy Committee to succumb to the strictures of the hawks and raise rates (in order to demonstrate that they are taking inflation seriously) is going to be difficult to resist over the coming weeks... Rising inflation does mean economic pain. But raising interest rates now would not be a pain-free option. Most borrowers would see their mortgage costs rise instantly. And a surge in unemployment, a house price collapse and general economic dislocation could follow. There will come a time when rates need to rise. But the economy has not reached that point yet. The Monetary Policy Committee needs to back its convictions with courage."

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