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Warning over interest rate rise

Monday June 14th 2010

A Bank of England policymaker has questioned the logic in persisting with record-low interest rates as inflation remains stubbornly high.

Andrew Sentance, who has served on the Bank's monetary policy committee (MPC) since 2006, said interest rates may have to rise from the current level of 0.5% to rein in inflation - which is running at almost double the Government target of 2%.

He said the spare capacity left over by the recession had not exerted much downward pressure on inflation so far. The Consumer Prices Index, the official measure of inflation, stands at 3.7% and is only expected to show a modest fall when figures for May are published by the Office for National Statistics on Tuesday.

Questioning the Bank's expansionary policy, Mr Sentence said he expected some "interesting debates" at MPC meetings in the second half of the year.

He said: "In late 2008 and through 2009, the MPC put in place a highly expansionary policy to offset the sharp contraction in demand driven by the financial crisis.

"However, the recovery in the economy and the resilience of inflation highlight the issue of how long such an expansionary policy will remain appropriate."

The Bank has been reluctant to raise rates because of the fragility of the economy and because of forthcoming tax rises and public spending cuts. It is thought raising rates too soon could plunge the UK back into recession and see thousands more people plunged into unemployment.

With the prospects for the country so unclear, mortgage protection insurance, which covers your home loan repayments in the event of redundancy or ill health, could offer some reassurance.

Copyright © Press Association 2010

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