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Call to let interest rates rise

Interest rates must be allowed to rise in order to help the UK's economy to recover, according to a leading think-tank.

Reform said in a report ahead of Wednesday's Budget that "excessively loose" monetary policy in the previous decade was the chief cause of economic imbalance - including the financial bubble - with consumers and businesses being allowed to borrow cheaply.

The report urged the Budget to bring in "more capitalism, not less", through the introduction of a range of market-friendly policies to boost returns on investment, such as cutting the deficit, decreasing marginal rates of tax and reshaping the public sector to allow more cost-effective service delivery, while allowing savers to benefit from high interest rates.

One of the report's authors, Derek Scott, warned Chancellor George Osborne that cutting the City "down to size" was not a sensible recovery policy. He dismissed the "fanciful and dangerous" idea that ministers or regulators can judge the right size for the financial sector, adding that a Government-led growth agenda was not likely to succeed.

The former Downing Street adviser said: "The widespread concern of policy makers to rebalance the economy may be understandable, but is only a secondary target for policy. These imbalances are the symptom of the problem rather than the cause. A central cause was the excessively loose monetary policy in the last decade most notably on the part of the (US) Federal Reserve and, for different reasons, as a result of European Monetary Union. This created inter-temporal imbalances and putting this right will entail at some stage higher interest rates in the UK."

Copyright © Press Association 2011

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