By Max Clarke
Reacting to the Bank of England's decision to maintain interest rates at the lowered 0.5% for a record 24 consecutive months, David Kern, Chief Economist at the British Chambers of Commerce; Ian McCafferty, Chief Economic Adviser to the CBI; and UK200Group members Jonathon Russel and David Ingall comment.
David Kern said:
“Businesses will welcome the MPC’s decision to leave interest rates and quantitative easing programme unchanged this month. Until the recovery is more secure later in the year, interest rates should be kept at current levels. A premature increase could have an adverse affect on growth and jobs, particularly in the services sector.
“An increase in rates looks increasingly likely over the next two to three months, and so the focus must be on minimising the harmful effects this could have on the economy. A modest increase in rates is unlikely to unleash a new recession, but the Government must use the Budget to introduce policies that will support growth.
“While the MPC cannot forecast its future actions, the way it currently communicates can create uncertainty. The MPC must address this in order to give businesses and market analysts a greater degree of predictability.
"Since higher inflation is unavoidable in the near term, it is important that the MPC does not over-react. If interest rates increase in the next couple of months, businesses must be reassured that future policy changes will not threaten the fragile recovery.”
Ian MacCafferty said:
“MPC members continue to have widely divergent expectations about the outlook for inflation, so this decision comes as no surprise.
“The short-term data continue to cloud the issue, but there are growing risks of inflation becoming more ingrained as firms attempt to bolster their profit margins and employees seek higher wage rises in the face of sharply increased costs of energy and commodities.
“The shifting pattern of MPC voting suggests that these risks are an increasing concern, and we continue to believe that a move away from the emergency 0.5% rate set during the financial crisis is likely in the second quarter. By acting early, the Bank can keep inflation expectations under control, preventing the need for more aggressive action later on.”
Jonathan Russell, partner, ReesRussell:
“Interest rates are used in monetary policy to control the spending of individuals in a consumer driven economy, such as ours. The basic principle is that increasing rates will reduce peoples spending - either reducing the cash available to those who borrow or increasing the desire to invest in those who have savings. This way inflation can be controlled by increasing or decreasing demand. However, this presumes that inflation is driven exclusively by demand.
“Unfortunately, at the moment inflation is not being driven by demand but in the main by commodity prices outside of UK control. Therefore increasing interest rates at the moment will not dampen our inflation and could actually have the adverse effect.
“If interest rates were to be increased it would a) dampen our already very fragile recovery, b) increase many people’s mortgage costs and in turn potentially create wage increase pressure, and c) it would hugely increase the interest charges on government debt, which would also increase the country’s debt issue.”
David Ingall, partner, JWP Creers:
“Interest rates are a problem. Inflation concerns suggest they should go up but an increase will affect businesses and those with mortgages.
“There is a suspicion that fixed rate mortgages are artificially high. This may be due to either lenders profiteering to rebuild their profit base or the effects of the increased regulation - probably a bit of both.”