Bank of England governor Mervyn King admitted to the UK Parliament last week that inflation would remain above the Monetary Policy Committee’s 2 per cent target through 2010. MPC members will be watching short term economic growth along with inflation and may be raising interest rates. In June, Andrew Sentence voted for a 0.25 per cent interest rise.
The MPC has added pressure to keep inflation under control with the release of better-than-expected GDP growth in the second quarter of 1.1 per cent. The Paris based Organisation for Economic Co-operation and Development has warned that there is a need to hike interest rates or there is a looming inflation crisis in store for Britain.
Others are warning MPC to keep the 0.5 per cent base rate alone. They predict UK Government’s spending cuts will have a strangling effect on inflation and there should be slow growth on GDP in the second half of the year.
The MPC is expected to stand off from raising the base rate at their monthly meeting this week, but they will certainly be discussing and watching the inflation threat.
David Kern, British Chambers of Commerce Chief Economist, said: “It is vital that the MPC keeps interest rates as low as possible, for as long as possible.”