By Max Clarke

The Federation of Small Businesses (FSB) is urging the Bank of England to keep its nerve and hold interest rates at 0.5 per cent when the Bank of England’s Monetary Policy Committee (MPC) meets tomorrow to set the rate.

The last monthly meeting of the MPC saw interest rates remain at their historic low of 0.5% for a record 22nd consecutive month. Rising inflation encouraged a split in the MPC’s board, with two members voting to rate rates in order to curb inflation rates, which have been forecast to hit 5% this year.

With unemployment reaching 2.5 million at the end of 2010, the VAT and fuel duty rise in early 2011 and the Government's austerity measures yet to take full effect, the FSB is concerned that an increase in interest rates will do more harm than good to the millions of small businesses that are already suffering.

Small business confidence fell dramatically in the final quarter of 2010 and the outlook for 2011 remains muted, according to the FSB ‘Voice of Small Business' Index. Confidence in the final quarter fell by -13.2 per cent as service sectors suffered badly in the run up to Christmas.

The FSB is concerned that a rise in the base rate will only fuel small firms' lack of confidence and will hinder, rather than create, an environment for growth.

John Walker, National Chairman, Federation of Small Businesses, said:

"The Bank of England must look to promote growth and leave tackling inflation as a medium term priority, at least until the impact of the increase in VAT and fuel duty has levelled out.

"Small business confidence is low, so it is vital that this important sector can begin to grow again. While we understand that an increase in the base rate will help to alleviate inflation, we are concerned that with already high unemployment and the figures likely to rise as the full impact of public sector cuts bite, that we must avoid a jobless recovery.

"Inflation is a worry for everyone and the Government does have tools at its disposal to help to alleviate pressures — namely through the introduction of a fuel duty stabiliser which will remove one of the key drivers for inflation."