Deloitte Says MPC’s Decision to Hold Interest Rate Boosts Its Credibility

Lucas Gilmore, “Big 4″ observer
February 10, 2011 /

Right after the Bank of England has retained the interest rate to 0.5 percent to fuel economic recovery, Deloitte released a press release statement stating that its Monetary Policy Committee (MPC) made the right decision and defended its credibility.

The MPC’s decision comes after Ernst & Young and Deloitte have raised concerns to BoE over the impact of raising the interest rate to the economy.

In mid January, economists from Ernst & Young urged the Bank of England to “hold its nerves” from raising the interest rate despite reports of a rise in inflation expected over the early part of 2011.

According to Ernst & Young ITEM Club, inflation is expected to rise to 4 percent in February due to cuts in public spending implemented by the government and VAT and commodity price increases.

Despite the report, Ernst & Young warned the BoE that any attempt to increase the interest rate would seriously hamper the economy from recovering.

Commenting on the latest move by BoE’s MPC, Roger Bootle, Economic Adviser to Deloitte, said the decision to keep the interest rate to its all time low level in March 2009 is the right thing to do.

“Given the huge amount of uncertainty about the underlying strength of both economic growth and inflation, the Committee would be foolish to rush into a premature tightening of policy. Indeed, as the fog clears, it should become clear that interest rates need to remain at an ultra low level indefinitely,” Bootle said.

“Admittedly, with oil prices reaching $100pb and agricultural prices still rising, CPI inflation now looks likely to get above 4% – and possibly close to 5% – within the next few months,” he added.

However, Bootle believes it is still hard to tell if the economy is back on the track of recovery.

“Consumer confidence plunged in January, employment is falling again and the housing market is still weakening.”

Nonetheless, he said the “panic about the rise in inflation is overdone” given that “there is no that the gilt market is currently getting alarmed about the MPC’s lack of grip.”

On the other hand, Bootle said increasing the interest rate would not aid in boosting the credibility of MPC.

“I think the view that the MPC can raise interest rates by ¼% or ½% to restore credibility without damaging the economic recovery is simply wrong. If the MPC raised rates now, it would be admitting that it had been wrong about inflationary prospects – and markets would demand that interest rate went much higher,” he said.

 

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