Bank urged to hold its nerve on interest rates

The Bank of England has been urged to hold its nerve on interest rates, despite the threat of rising inflation. 


Last week, the Bank confirmed that the base rate would remain on hold at 0.5% for the twenty-second month in succession. 


Views on when rates will start to rise again are mixed, although only one member of the Bank's Monetary Policy Committee (MPC), Andrew Sentance - the group which makes the decisions on rates - has voted to increase rates. There are fears, however, that increasing the base rate could push thousands of home owners into arrears or even see them lose their homes, as they would no longer be able to afford their mortgage repayments. 


Ernst & Young has added its voice to the debate, calling for the Bank to stand firm on rates. The firm has predicted that inflation could rise to 4% next month. "It's going to be a tense start to 2011," Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club commented. "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. However it's vital that the MPC stands firm. These are temporary pressures, domestic cost inflation remains low and CPI inflation will come back to heel in 2012 once the VAT increase falls out of the figures next January."