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BDO warning over interest rate hike

Monday March 14th 2011

Britain's economic recovery could be derailed if the Bank of England increases interest rates too soon, a business advisory group has warned.

Accountancy firm BDO believes economic growth for the first half of this year will remain weak, while gross domestic product (GDP) prospects could be thwarted if the Bank's Monetary Policy Committee (MPC) raises the base rate from its historic low of 0.5%.

It is expected that the MPC will raise the cost of borrowing sooner than experts had previously expected after the consumer price index (CPI) rose to 4% in January - double its target of 2%. This view was reinforced after it emerged that three MPC members voted for a rate rise during their February meeting.

However, BDO warned that such action could boost the strength of the pound, which would hamper the manufacturing sector by making UK exports less competitive around the world.

Peter Hemington, partner at BDO, said: "Tackling inflation is clearly at the top of the MPC's agenda, but it could be a policy error to raise interest rates as early as April or May, as this could seriously derail growth prospects.

"With growth forecasts remaining fragile for the next two quarters, attempts to tame inflation could push up the price of sterling and make exports less competitive, threatening what growth there is in sectors such as manufacturing. The MPC must hold its nerve, or risk scuppering recovery prospects."

Copyright © Press Association 2011

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