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OECD wants UK to raise interest rates

The organization for Economic Co-operation and Development is of the opinion that Bank of England should start raising interest rates on a slow pace in order to beat inflation. OECD wants UK to raise its key interest to 1% by the end of 2011 and 2.25% by the end of 2012. It feels that a raise would definitely help to prevent further increases in public inflation expectations. According to the six monthly reports on the Global economy, OECD states that an increase in interest rates should take place during 2011 in order to break off increases in inflation expectations.

In March, OECD had predicted 1.5% of UK’S 2011 GDP growth. But now it has lowered its forecast with regard to UK’S 2011 GDP growth to be 1.4%. Also, the growth estimate for the year 2012 has been also lowered to 1.8%. Previously, it was estimated 2%. Most of the bank’s policy makers feel that the economic recovery is too fragile to withstand a rise in this present situation. Hence, Bank of England has kept the base rate of interest at a low record of 0.5% for more than two years. According to OECD, Global recovery is under way but it is taking place at various speeds across different countries.

The OECD bluntly criticized politicians in Washington DC for having failed to deliver a plan to reduce America’s budget deficit. According to Congressional Budget office, America’s budget deficit is forecasted to reach 9.8pc of gross domestic product this year. OECD feels that there is an urgent need for a well articulated medium term strategy which is meant to put general government finances on a sustainable path.

The US and Euro area economies were growing faster than expected six months back. But due to the increase in oil prices and other commodities, the damage that took place in Japan on account of the earthquake and a sharp slowdown in China, made the recovery process to go out of gear. OECD expects the world’s largest economy (US) to see a decent pick up from the second quarter as interest rates remain low. It further expects the effects of high commodity prices, weaknesses in labour and property markets, including household balance sheets to fade gradually. On the other hand, the head of currency strategy at Canadian Imperial Bank of Commerce in London, says that the news flow in Europe continues to be on the down side and there are obvious reasons for not preferring to hold euros.

There are mixed sentiments dominating the global financial markets. The confidence in the market scenario is down due to the ongoing fears over Europe’s deficit crisis, the economic expansion in the UK and the rising commodity prices. All these situations have created a negative market situation. The Dollar continues to be in preference, as long as euro debt concern prevails. At this point, investors are less likely to back to euro. Presently they prefer to protect their profits in US Dollar backed assets.

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OECD wants UK to raise interest rates

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