The Shadow Monetary Policy Committee has ruled by a majority of five to four in favour of raising the bank rate to 1 per cent on February 10.
At the quarterly gathering of independent economists, the five members who voted in favour of the rate rise outlined three major causes for concern that led to their decision.
The first has been described as the threat to the UK’s fight against inflation, based on what has been described as ’persistent overshoots’ of the 2 per cent consumer prices index target.
This has been highlighted as particularly relevant due to the 4.75 per cent inflation rate that is being recorded by the various retail price measures.
Additionally, the SMPC made the argument that the global economy is in fact closer to overheating than it is to depression.
The point was also made that any depreciation of sterling reflects the relative laxity of the UK’s monetary stance compared with other countries.
Despite these arguments in favour of a rate rise, the four minority members of the SMPC felt even a small rate hike could generate additional uncertainty for businesses.
This minority also felt that the fragility of the British banking system meant it would be unable to generate sufficient money and credit required to support the recovery.
The SMPC has not called for a rise in interest rates since they fell to 0.5 per cent almost two years ago.
Both sides agreed that both the Basel III proposals on bank regulation risked denting global supplies of money and credit. This created the possibility of a renewed global recession, the SMPC said.
The hike in VAT to 20 per cent is likely to squeeze living standards, members added, depressing household consumption.
A group of senior economists founded the SMPC in 1997 to debate the policy decisions of the Bank of England’s Monetary Policy Committee.
On this occasion, the SMPC’s view differed markedly from the official view of the MPC at its last meeting in January, which was to keep rates on hold.