Ernst & Young LLP’s Item Club will say the Bank of England must “hold its nerve” and not raise its key interest rate until the recovery shows signs of overcoming the impact of the government’s budget squeeze.
“With inflation likely to reach 4 percent this spring, the Monetary Policy Committee will come under intense pressure,” the research group will say in a report to be issued in London Monday, according to an e-mailed statement. It should “keep base rates where they are until it is clear that the economy is taking the fiscal adjustment in its stride.”
The central bank maintained emergency stimulus last week as it weighed the threats of spending cuts against the risk that higher oil prices and sales tax rate will keep inflation above the government’s 3 percent limit. Citigroup Inc., Societe Generale SA and BNP Paribas SA said this month the bank may increase the benchmark rate faster than previously anticipated.
The Item Club, which uses the same forecasting model as the U.K. Treasury, will revise its prediction for economic growth this year to 2.3 percent from 2.2 percent. It will cut its 2012 projection to 2.8 percent from 2.9 percent.
“The fiscal retrenchment will keep gross domestic product subdued, while commodity price rises and the VAT hike will push inflation close to 4 percent and leave the MPC agonizing whether to increase the base rate,” Peter Spencer, chief economic adviser at the Item Club and a former Treasury official, will say. “However, it’s vital that the MPC stands firm.”
The group will say that exports and investment will be “sufficiently strong” for the recovery to continue and that inflation will slow, easing pressure on household incomes. The central bank held its key rate at a record low 0.5 percent and bond plan at 200 billion pounds ($317 billion) last week.
In a sign of building price pressures, input-price inflation accelerated to 12.5 percent in December from 9.2 percent, data last week showed. Consumer-price growth may have quickened to a seven-month high of 3.4 percent, according to the median forecast of 31 economists in a Bloomberg News survey.
The U.K. statistics office will publish the December consumer-price inflation data on Tuesday.
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