Bank of England May Be Forced to Raise Rate: Economist

The UK consumer sector is “extremely challenging” but the Bank of England will probably be forced to raise interest rates later in the year, Adam Chester, chief economist at Lloyds Bank Corporate Markets told CNBC.

“I really don’t think we’re going to see any contribution to growth from the consumer sector, both this year and possibly in 2012 as well,” Chester said in an interview Wednesday.

In an environment of dwindling real incomes, public sector cutbacks and weak consumer spending, growth would have to come from business investment and exports, but these are not yet strong enough to ensure a sustained economic recovery, he added.

Interest Rate Rise?

With sluggish growth and weak consumer spending, Chester said the Bank of England faces “a massive dilemma” and may be forced to abandon its current position of holding interest rates despite spiraling prices.

“The growth conditions remain fragile, inflation remains elevated, I think the inflation pressures that are beginning to build are beginning to concern the Bank of England and I think when push comes to shove, they may have to raise interest rates, even in the face of a weak economic backdrop,” he explained.

Chester said he believed a rise of 0.25 percent was likely to happen in November, with the main rate rising to two percent by the end of next year; but with inflation at more than double its target of 2 percent, an interest rate rise could even occur over the summer, he said .

“There is a risk on both sides, there is a risk that the first rate rise could come earlier than that, possibly August, the inflation numbers over the next three to six months are likely to show headline inflation up at 5.5, possibly even 6 percent, so it’s going to make a very uncomfortable environment for the Bank (of England) to maintain the policy status quo,” he added.

However, in a speech in London on Wednesday night, Bank of England governor Mervyn King gave no indication of an imminent interest rate rise by the Bank’s Monetary Policy Committee.

King defended his current policy of maintaining exceptionally low interest rates, adding that inflationary pressures were likely to ease without intervention by the Bank of England’s Monetary Policy Committee.

“So far, subdued rates of increase in average earnings, as were as remarkably – some might say disturbingly – low growth rates of broad money have provided strong signals that inflation will fall back in due course,” he said.