"The MPC's decision to leave interest rates and the quantitative easing (QE) programme unchanged this month was widely expected. We support this decision, but it is important that the MPC perseveres with the existing policy approach, at least until the middle of the year. Recent calls for early increases in rates are ill advised and should be rejected.
“The UK recovery is fragile and risks of a setback are serious. Pressures on businesses and individuals will intensify over the next few months, but we urge the MPC not to over-react to temporary increases in inflation. As long as wage increases remain modest, and disposable incomes continue to be squeezed, it remains highly likely that the surge in inflation will be reversed, and sharp falls can be expected in the final months of 2011 and in 2012.
“It is likely that interest rates will need to increase later this year. But the MPC must wait until the economy has absorbed the initial impact of the austerity plan. Premature interest rate increases, while fiscal policy is still being tightened, risk derailing the recovery and could make it harder to implement deficit-cutting measures.”