Hold interest rates until late 2018 to support stalling economy

Says EY ITEM Club

With the UK economy looking set to remain stuck in low gear for the rest of this year and well into 2018, the Bank of England’s Monetary Policy Committee (MPC) should keep interest rates on hold until late 2018 to avoid weakening the fragile economic outlook, says the latest forecast from the EY ITEM Club.

The EY ITEM Club’s Autumn forecast predicts that GDP growth will be limited to 1.5 per cent in 2017 and 1.4 per cent in 2018, although activity will gradually strengthen towards the end of next year. However with expectations high that interest rates may rise from 0.25 per cent to 0.50 per cent this November, the EY ITEM Club is urging the MPC to wait until the UK’s economic prospects look brighter and there is greater certainty over the Brexit transition arrangements, which will support levels of business investment.

Delay interest hike until late 2018 says EY ITEM Club

Howard Archer, chief economic advisor to the EY ITEM Club comments: “We are far from convinced that raising interest rates this year is the recommended course of action. We believe that it is still likely that inflation will fall back markedly through 2018 as the impact of sterling’s past drop fades and domestic price pressures are limited by lacklustre growth, with only a gradual pick-up in earnings. Brexit uncertainties are also likely to remain elevated well into 2018 and perhaps beyond.

“While it is understandable that the MPC will want to gradually normalise interest rates from their current ‘emergency levels’, we believe it would be better to do so once the economy is on a stronger footing.”