LONDON (MNI) – Rating agency Standard & Poor’s said Tuesday that
rising inflation may spark “a cautious rise” in interest rates in the UK
and Eurozone this year.
S&P published remarks by its chief economist Jean-Michel Six
warning of a “sub-optimal” policy response, with central banks seeking
to restore inflation fighting credibility at a time when the economic
recovery is weak.
In a report entitled “Europe’s Inflation Dilemma Is Weighing On The
Economic Outlook,” the agency highlighted the problems posed by above
target inflation outturns at a time of fragile recovery.
“On the one hand, central banks will be tempted to raise interest
rates, a typical way to fight inflation,” S&P’s chief economist
Jean-Michel Six said.
“But on the other hand, a weak economic outlook among most members
of the European Monetary Union and the U.K., together with an unresolved
debt crisis among some sovereigns, still appears to call for an
accommodative monetary policy, with continued so-called nonstandard
measures and very low interest rates,” he added.
Looking at the BOE’s Monetary Policy Committee’s dilemma Six said
“With its credibility as an inflation fighter increasingly at stake, we
believe the MPC is likely to proceed with a first interest rate hike by
the autumn, or even sooner if GDP and other key economic indicators come
in stronger than expected.”
S&P forecasts BOE Bank Rate at 1.0% by year end.
In the eurozone rising inflation poses a dilemma for the European
Central Bank, with uncertainty over the economic recovery and the
sovereign debt crisis supporting accommodative monetary policy and a
continuation of nonstandard measures.
“The trade-off between the risks associated with each option leads
us to expect a suboptimal policy outcome of higher interest rates
starting in the autumn, but a continuation of the nonstandard measures
well into 2012,” Six said.
–London newsroom: 004420 7862 7491 e-mail:ukreporters@marketnews.com
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