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EY Item Club recommends interest rates hold

Article By: ,  Financial Analyst
January 20, 2014 9:15 AM

The UK's base rate of interest should be retained at 0.5 per cent, according to the latest report by the EY Item Club.

It stated that until real-time wages start to grow, the Bank of England's Monetary Policy Committee ought to hold the base rate at its current record low level for the UK.

Earlier this month, the committee announced that it was holding interest rates for another month. The base rate has been held at 0.5 per cent in the UK since March 2009. Just six months previous to that, UK interest rates had stood at 4.5 per cent before the global financial crash.

In its new quarterly report into the state of the UK economy, the EY Item Club argued that a rate rise could have a negative impact on the recovery.

Inflation in the UK recently dropped to two per cent – the government's target rate – while unemployment has been edging towards seven per cent. Governor of the Bank of England Mark Carney claimed last year he would not consider increasing interest rates until unemployment was down to seven per cent, though he noted this would not be an automatic trigger.

Historic rates

Peter Spencer, chief economic advisor to EY Item Club, stated that the body is not sure when the last time employment was rising and real wages were falling was.

He said: "The weakness of real earnings is proving to be the government's Achilles heel and could prove to be the weak spot in the recovery. Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio."

The EY Item Club predicts that consumers are going to continue to propel growth in the coming months, forecasting that UK GDP will expand by 2.7 per cent in 2014, an increase from the figure of 1.9 per cent that was recorded in 2013.

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