Base rate increase could damage recovery, says Ernst & Young

An increase in base rates could endanger recovery in what will be a difficult year for the economy, according to the Ernst & Young ITEM club.

The economic forecaster has called on the Bank of England to “hold its nerve” and stand firm against pressure to raise interest rates from a record-low of 0.5%.

It says the current high level of the consumer price index, the method used to measure inflation, is largely down to VAT and commodity price increases, and says it expects the CPI to fall back to the 2% target when these temporary influences finish. (article continues below)

The ITEM Club’s forecast shows the economy growing by 2.3% this year, recovering to 2.8% in 2012. Recovery, it says, will be led by a resurgent manufacturing sector taking advantage of both a low pound and the rapid growth of emerging economies to increase exports.