OECD urges Bank of England to raise rates

The OECD, the "club" for the world's most advanced economies, has said the UK will experience slower growth than previously expected, but called on the Bank of England to push the Bank Rate up to 1 per cent by the end of this year, and to 2.25 per cent by the end of 2012, compared with the current historic low of 0.5 per cent.

Markets have already priced in much of that suggested hike, as part of a widely anticipated gradual "normalisation" of monetary policy, but it would be be an unwelcome intensification of the squeeze already facing households and businesses. The OECD's call for higher mortgage bills was echoed by a retiring member of the Monetary Policy Committee, Andrew Sentance, who warned in a speech that the Bank's credibility on inflation will "erode" unless action is taken soon.

In it latest economic outlook, the OECD lowered its forecast for the U.K GDP growth this year to 1.4 per cent from the 1.5 per cent it predicted in March and for 2012 to 1.8 per cent from 2 per cent. Both are below the official, Office for Budget Responsibility, projections of 1.7 per cent and 2.5 per cent respectively. Any of these figures would represent a feeble recovery on past precedents. Yet the OECD says that the Bank should raise rates: "A modest increase in interest rates should be taken during 2011 to stave off increases in inflation expectations, which are already elevated."

But: "Unemployment is likely to increase in the short term, reflecting the slow recovery and rising labour force participation". The jobless rate will peak at 8.3 per cent in 2012, from 7.7 per cent today.

However, the OECD continues to endorse the Government's "necessary" strategy to reduce the budget deficit – still the largest among the larger mature economies – provided the Treasury also allows borrowing to rise temporarily if the economy slows, via the "automatic stabilisers". The Treasury has indicated it will do this – £46bn of such cyclical borrowing by 2015 is scheduled in the March Budget.

Ministers have made much of international backing for their plans and will be pleased that the OECD has reiterated its previous warm endorsements. "The current fiscal consolidation strikes the right balance and should continue in line with the Government's medium-term plan to eliminate the deficit, while allowing the automatic stabilisers to work," the OECD said.

But the suggestion that VAT rates on lower-rated items such as children's clothes be "harmonised" to pay for a boost to public spending on infrastructure is unlikely to be taken up.

The OECD concludes that "historically high unemployment remains among the most pressing legacies of the crisis. It should prompt countries to improve labour market policies that boost job creation and prevent today's high joblessness from becoming permanent". Global GDP is projected to rise 4.2 per cent this year and 4.6 per cent in 2012.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Loren Hughes: Financial Accountant

£45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

Sheridan Maine: Finance Analyst

Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

Sheridan Maine: Financial Accountant

£150 - £190 Daily Rate: Sheridan Maine: One of London's leading water supplier...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor