UK interest rate rise 'mistake'

The Bank of England's decision to raise UK interest rates earlier this month risks stifling the fragile recovery, an influential forecaster believes.

The quarter-point boost to 3.75% was the first upwards move in nearly four years, and was prompted by worries about soaring debt and house prices.

But the 6 November move came too soon, warns the Ernst & Young Item Club.

And another rate rise before Christmas, as some economists predict, would prove "premature", it says.

The Item Club uses the same economic model as the Treasury to plot how it believes the economy will develop.

Confidence

The move to raise rates by the Bank of England's Monetary Policy Committee followed a split decision in October which kep rates stationary only by the casting vote of the Governor, Mervyn King.

The risk is that in tightening the monetary policy screw too early, the MPC will choke the life out of the fragile economic recovery Peter Spencer, Ernst & Young Item Club

But since the move, Mr King has stressed his concerns about swelling consumer debt, cautioning people in the UK to take a closer look at how much debt they can really afford.

That has been taken by some observers as a signal of more rises to come, and soon.

That, said Item Club chief economic adviser Peter Spencer in a study, would be a mistake.

It could, he said, trigger "serious retrenchment" and a collapse in consumer confidence - a serious matter given that consumer spending has been the engine driving the recovery.

"Although there have been encouraging signs recently in terms of a pick-up in the world economy and UK investment intentions, none of these are secure enough to survive the fall in consumer sentiment that will follow another premature hike in interest rates," he said.

And even the most recent rise was problematic enough.

"The risk is that in tightening the monetary policy screw too early, the MPC will choke the life out of the fragile economic recovery," he said.