Law has called upon the Bank of England to react more quickly to economic data to protect homeowners and avoid a series of panic rate rises in 2012.
Law said: “The Bank of England’s refusal to raise interest rates so far this year, in spite of improving economic conditions and growing inflation, could result in a series of panic rate rises in the next two years which will have a serious impact on homeowners. It is now a well known fact that the Monetary Policy Committee was far too slow to reduce interest rates as the UK entered the recession and eventually had to rush through a rapid reduction in rates to try to stimulate the economy.
“Its continued reluctance to respond to recent statistics, including a booming services sector, falling unemployment, rising inflation and strengthening house prices, means it will be forced to act suddenly when these early indications of market recovery turn into irrefutable evidence and are reflected in GDP, continued house price growth and other economic data. If the Bank delays too much in introducing gradual interest rate increases now then we could see the need for a panic move of greater increases in 2012 or 2013 to reflect a strengthening economy and to combat inflation.
“We are calling on the Bank to increase interest rates to 1% by the end of this year, 0.25% by August and 0.25% in the autumn. This would have a negligible impact on homeowners who would continue to benefit from low rates. Rates should continue to be raised gradually after that to reflect the recovery. Gradual base rate rises would also be more likely to permit banks and building societies to react and start to reduce their own lending margins, benefitting homeowners. Savings rates would also increase generating more capital for those living on savings.”
Matt Smith, managing director at WPB, said: “My view is that I don’t agree that the economy is in as fine of a state that is appropriate for interest rate rise. Flatlining GDP growth over the last two quarters would seem to support the need for the fiscal changes coming through. Raising interest rates would just add pain.
“If all the factors that would promote interest rate rise were accurate then I think then there would be a debate however I don’t think that is the case currently. Also the IMF has backed the macroeconomic policies the UK which includes interest rates. Perhaps in London, an interest rate rise would be appropriate but they impact on the national level. Altering interest rates is a crude hammer to crack this nut where fiscal policy alterations are a tool which is far more appropriate.”
