The 64 million dollar question

So interest rates are back on the agenda. The latest Organisation for Economic Cooperation and Development (OECD) Economic Outlook report suggests that interest rates will have to rise sooner rather than later. In fact the OECD expects the Bank to lift rates to 1% from 0.5% this year and to rise by a further 1.25% next year bringing it to 2.25% by the end of 2012.

How so? Well the OECD’s chief economist, Pier Carlo Padoan, says a rate rise is desirable as it will prevent ‘continued increases in inflation expectations’. He said: ‘We would be in trouble in the UK and elsewhere if, in a period of slow growth and fiscal contraction, you also have inflationary expectations getting out of control’.

And this thought is echoed by others. In a parting shot to his soon to be former colleagues at the Bank of England’s Monetary Policy Committee, arch hawk Andrew Sentence reiterated his call to raise interest rates. He said: ‘Continuing to accommodate inflation makes it more likely that a sharp policy correction will be needed’.

So it’s all up in the air again. But as echoed in previous blogs, I am not of this school of thought. Looking at the growth figures for the first quarter of this year, consumer spending fell by 0.6% during the period but more worryingly than this, there was a ghastly drop in business investment. A 7.1% fall during the quarter. I fear that raising rates on the back of this GDP data would do no good to the economy and in fact tip it back into a recession.