An increase in base rate could endanger economic recovery in what will be a difficult year for the economy, according to the Ernst & Young ITEM club.
The economic forecaster has called on the Bank of England to “hold its nerve” and stand firm against pressure to raise interest rates from a record-low of 0.5 per cent.
It says the current high level of the consumer price index, the method used to measure inflation, is largely down to VAT and commodity price increases, and says it expects the CPI to fall back to the 2 per cent target when these temporary influences finish.
The ITEM Club’s forecast shows the economy growing by 2.3 per cent this year, recovering to 2.8 per cent in 2012. Recovery, it says, will be led by a resurgent manufacturing sector taking advantage of both a low pound and the rapid growth of emerging economies to increase exports.