Economists warn of further market chaos if base rates rise

The Bank of England could trigger another bout of turmoil in the London stock market if it raises interest rates this week, leading monetarist economists have warned.

The shadow monetary policy committee, which includes Sir Alan Walters, Lady Thatcher's former economic adviser, and Professor Patrick Minford from Cardiff Business School, urged the Bank's Monetary Policy Committee to keep base rates unchanged at 7 per cent when it meets on Thursday.

Many City economists expect the Bank to raise rates by 0.25 per cent, in order to avoid breaching the upper limit of 3.5 per cent in the Government's inflation target in the future.

If inflation rises by more than 1 per cent above the central target rate of 2.5 per cent, the Governor of the Bank has to write to the Chancellor of the Exchequer giving an explanation.

But Professor Minford said he did not believe the Bank would risk further market turbulence by raising rates. "After the stock market drop you've got the risk of overkill. Exchange rates are also high that a rise in interest rates could trigger further falls in share prices."

The FTSE 100 index ended last week 127.9 points lower at 5330.8, having recovered some of its lost ground after a 458 point plunge at one stage on Tuesday. Despite the turmoil, some City economists have urged against loosening monetary policy to settle the markets, a mistake made by policymakers after the crash of 1987.

The group of monetarists, which met before the crash, said rates would have to rise in the future to meet the inflation target, though in the short term the strength of the pound would have a dampening effect on economic activity.

Professor Minford said he believed the UK economy had "peaked", with consumer spending growth slowing as the impact of building society windfall bonuses ebbed, despite continuing strong growth in the money supply.

However, others on the committee warned that share and property prices were rising to unsustainable levels, as they did at the peak of the booms in the early 1970s and later 1980s.

Meanwhile, Gordon Brown, the Chancellor of the Exchequer, yesterday reaffirmed his commitment to keep the pound out of the exchange rate mechanism (ERM) before the UK joins European economic and monetary union. "We have no intention of entering the ERM," Mr Brown said on BBC television.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: DBA Developer - SQL Server

£30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Customer Service Administrator

£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

Recruitment Genius: Dialler Administrator

£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

Ashdown Group: Contracts Manager - City of London

£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

Day In a Page

Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen
RuPaul interview: The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head

RuPaul interview

The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head
Secrets of comedy couples: What's it like when both you and your partner are stand-ups?

Secrets of comedy couples

What's it like when both you and your partner are stand-ups?
Satya Nadella: As Windows 10 is launched can he return Microsoft to its former glory?

Satya Nadella: The man to clean up for Windows?

While Microsoft's founders spend their billions, the once-invincible tech company's new boss is trying to save it
The best swimwear for men: From trunks to shorts, make a splash this summer

The best swimwear for men

From trunks to shorts, make a splash this summer
Mark Hix recipes: Our chef tries his hand at a spot of summer foraging

Mark Hix goes summer foraging

 A dinner party doesn't have to mean a trip to the supermarket
Ashes 2015: With an audacious flourish, home hero Ian Bell ends all debate

With an audacious flourish, the home hero ends all debate

Ian Bell advances to Trent Bridge next week almost as undroppable as Alastair Cook and Joe Root, a cornerstone of England's new thinking, says Kevin Garside
Aaron Ramsey interview: Wales midfielder determined to be centre of attention for Arsenal this season

Aaron Ramsey interview

Wales midfielder determined to be centre of attention for Arsenal this season
Community Shield: Arsene Wenger needs to strike first blow in rivalry with Jose Mourinho

Community Shield gives Wenger chance to strike first blow in rivalry with Mourinho

As long as the Arsenal manager's run of games without a win over his Chelsea counterpart continues it will continue to dominate the narrative around the two men
The unlikely rise of AFC Bournemouth - and what it says about English life

Unlikely rise of AFC Bournemouth

Bournemouth’s elevation to football’s top tier is one of the most improbable of recent times. But it’s illustrative of deeper and wider changes in English life
A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

A Very British Coup, part two

New novel in pipeline as Jeremy Corbyn's rise inspires sequel
Philae lander data show comets could have brought 'building blocks of life' to Earth

Philae lander data show comets could have brought 'building blocks of life' to Earth

Icy dust layer holds organic compounds similar to those found in living organisms