Interest rates will be raised within three months by 0.50% – but that will be the only rate rise of the year and it might not even prove necessary.
The prediction has come from Douglas Williams, chief executive of the Centre for Business and Economics Research (CEBR), who also slammed the rise in VAT.
Williams made the forecast after Bank of England chief Mervyn King refused to be drawn on whether the current 4% rate of inflation would rise or fall, whilst his colleague Andrew Sentance called for interest rates to be made “sooner rather than later”.
Williams said that King had prepared the ground and that Sentance would not have made such a forceful call had he not felt confident that the MCP will raise rates.
Williams also cited uncertainty in the Middle East, which has already raised oil prices. He warned that if the unrest spreads further, oil prices could go up “considerably” more. He also said that the effect of squeezed incomes and public spending cuts would become clearer as the year goes on.
Williams added: “Although I think that in time a rate rise is likely to prove to have been unnecessary, I suspect that the MPC will not wait long enough for the evidence of this to come through.
“There are clearly different and changing views on the MPC and this makes what happens uncertain. But I think if we are to see a rate rise, and if we are right about the way the numbers are going, it is more likely in the next three months (while demand conditions look stronger) than later.
“And I think that there will be a temptation to show willing by moving 50 basis points rather than 25, though the latter may end up as a compromise.”
He added: “In retrospect, although the cuts in public spending that are taking place are necessary and some of their implications exaggerated, the VAT rise last month now looks to be a policy error that has added to inflationary pressures at the same time as cutting disposable incomes.”
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