Ernst & Young to Bank of England: Hold Back Interest Rates Amid Inflation

Lucas Gilmore, “Big 4″ observer
January 17, 2011 /

Economists from accounting and business advisory firm Ernst & Young raised a clarion call directed to Bank of England, urging it to “hold its nerves” from raising interest rates despite reports of a rise in inflation expected over the early part of 2011.

Economy experts from Ernst & Young ITEM Club released predictions projecting the inflation rate to skyrocket to 4 percent in February aided by the spending cuts in government, and VAT and commodity price increases. Despite this prediction, Bank of England should hold back any attempt to raise interest rates as it would seriously harm the economy that’s on its way of recovering from the crisis, Ernst & Young warned.

“ A premature rate rise would boost the pound, weakening the UK’s ability to increase its exports – particularly into the emerging markets,” it added.

“It’s going to be a tense start to 2011. The fiscal retrenchment will keep GDP subdued while commodity price rises and the VAT hike will push inflation close to 4% and leave the MPC agonising over whether to increase the Bank base rate,” chief economic advisor to the Ernst & Young ITEM Club Peter Spencer said.

Ernst & Young ITEM Club went on to forecast that economic pressures that continue to halt any signs of moving on will fall out next year, pulling inflation rate down to 2 percent as targeted. Along with pressures on inflation, the ITEM Club continued, economy will grow at a pace quite below the normal trend following austerity measures of the government expected to take effect sooner. Inflation will push GDP growth to just 2.3 percent this year, but will move on to 2.8 percent in 2012, Ernst & Young said.

Ernst & Young ITEM Club, on the other hand, said the projected 7.3 percent rise in UK exports and investments this year as firms shift their focus to emerging markets by setting cost-cutting aside and adopting the expansion mode, offers some hope amid projected rise in inflation rate.

Deloitte said earlier this month that most UK firms are now more ready to risk in businesses than they were prior to the 2008 global economic crisis as chief financial officers are now targeting expansion, rather than defense, either by creating new products or services or by shifting to new markets.


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