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Interest rates ‘unlikely to rise this year’

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Following today’s publication of the minutes from the latest Monetary Policy Committee (MPC) meeting, a leading macroeconomic research consultancy expects interest rates to remain at 0.5 per cent throughout 2011.

Each month the independent MPC advises the Bank of England whether or not to adjust the national interest rate level, and for several months industries such as retail have been warning about the dangers to consumer spending if the rate were to go beyond the current historic low of 0.5 per cent.

April’s meeting concluded that there should be no change to rates and Capital Economics believes the continued fragility of the economy will make an increase in rates unlikely in the near future.

Vicky Redwood, Senior UK Economist at Capital Economics, said: “The dovish tone of the minutes of April’s MPC meeting has further reduced the chances of a rise in interest rates at next month’s meeting.

“If the recent weaker tone of the economic data is sustained, we still think that a rate hike this year can just about be avoided.”

Inflation eased last month but the MPC still warned that it could yet exceed five per cent and Redwood says that if the Q1 GDP figure, published next week, is better then expected rates could yet rise in May.

An interest rate increase will lead to household mortgage and loan costs rising, further dampening consumer demand, and legal professionals have even warned that it could be the catalyst for a number of retail redundancies.

Most believe that as long as the recovery remains sluggish the rate will remain unchanged and Capital Economics is not expecting an acceleration in economic growth anytime soon.

Redwood added: “Even if the committee does not hike in May, a rate rise later this year will still be a danger.

“But if we are right in expecting the recovery to continue to struggle, interest rates will probably end the year at their current level.”

Published on Wednesday 20 April by Editorial Assistant

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