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Bank is foolish not to raise 0.5% interest rate, says economist


Call: Dr Esmond Birnie

Call: Dr Esmond Birnie

Nigel McDowell/Ulster University

Call: Dr Esmond Birnie

Failure by the Bank of England to increase interest rates will be storing up problems for how we cope with a future recession, an economist has said.

The Bank of England's monetary policy committee is expected to opt to keep interest rates at 0.5% at its meeting today.

Rates had been cut to 0.25% from 0.5% in the aftermath of the vote to leave the EU in June 2016, before they were moved back to 0.5% in November. The move was the first interest rate rise in the UK since July 2007.

Bank of England Governor Mark Carney had indicated in November that economic policy had been entering an era of slow, gradual rate increases.

Now they are expected to be retained at 0.5% following a series of disappointing economic data releases for the first quarter of the year.

But Dr Esmond Birnie, senior economist of the Ulster University economic policy centre, said: "We are now 10 years on from the last recession. The likelihood of another downturn is increasing.

"If the Bank does not begin to increase interest rates now the threat is that the Bank/MPC will have limited scope to cut interest rates to deal with a recession because the rates will be so close to zero".

And the economist added that a longer delay also meant that when increases do arrive, they will have a greater impact as they are less likely to be gradual.

Recent official figures showed the economy grew at its slowest pace in five years in the first quarter. Gross domestic product (GDP) slowed sharply to 0.1%, down from 0.4% in the previous three months, as the impact of the 'Beast from the East' compounded woes in consumer-facing and construction sectors.

And there are fears that the first-quarter slowdown may not just be a weather-related blip, with official data revealing more widespread weakness and survey data for April showing little sign of a bounce-back.

The Bank is expected to cut its 2018 growth forecast in today's accompanying inflation report, down from the 1.8% predicted in its quarterly report in February, while also trimming inflation predictions.

Most experts believe policymakers would not be able to justify increasing rates until August at the earliest, which could well be the last rise until 2019.

Howard Archer, chief economic adviser at the EY Item Club, said: "Recent events have made an interest rate hike on Thursday seem progressively less likely - to the extent that it now looks a very long shot."

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