Bank of England to keep interest rates low to boost economy

The Bank of England is expected to signal this week that interest rates will remain low for several years to spur the economy, despite growing evidence that the recovery is gathering pace.

At a meeting on Wednesday, the central bank's new governor, Mark Carney, will outline plans to boost lending to Britain's business community with an assurance that several hurdles will need to be overcome before base rates can rise from the current 0.5%.

The use of "forward guidance" to give the international markets and consumers a steer on when rates might rise has been adopted by the US Federal Reserve and is known to be on Carney's list of initiatives for the Bank of England.

Knowing inflation is predicted to fall over the next two years and that growth is accelerating, Carney is likely to argue that the recovery remains fragile and could easily blow off course without low rates and £375bn of lending to financial institutions through Threadneedle Street's quantitative easing scheme.

His supporters point out that the construction and manufacturing sectors, which have shown renewed signs of life in recent surveys, remain well below their peak levels of activity while the services sector, which has led the recovery, is dependent on consumer spending.

The CBI on Sunday warned that growth faced "significant risks"; there was a backdrop of falling new orders for small- to medium-sized manufacturers, "disappointing" expectations.

The business lobby group said domestic orders were static and exports had fallen for a fifth consecutive quarter, with output having a slight fall.

Prospects for the next three months were said to be slightly better, with output expected to stabilise and new orders contracting at a slower pace.

Investment plans for the coming year were "broadly unchanged", its survey of 390 manufacturers showed.

The EEF, the manufacturers' lobby group, gave its own health warning, after it upgraded its growth forecast to 1.1% this year, up from its previous prediction of 0.9%, following a rise in industrial orders over recent months.

It said the economy needed a business investment boost to surpass the 2.5% long-run average many economists thought critical to lowering unemployment.

Lee Hopley, chief economist at the EEF, said: "Across the whole economy business investment is 34% lower today than at the peak in 2008. We think the UK has reached rock bottom and the only way is up."

She added that the pace of job losses in the sector was expected to continue, albeit more modestly this year and in 2014, while the eurozone posed less of a risk to the UK's growth prospects.

A survey across all sectors of the economy for the ICAEW, the accountancy body, found that business confidence was at a three-year high in the last three months and a majority of firms expected sales and staff numbers to grow.

ICAEW's chief executive, Michael Izza, said: "Confidence is at a high level, and with the economy expected to grow by 1.0% this quarter, businesses need to make the most of the environment to ensure the recovery is consolidated."

But he supported the EEF's view that long-term investments in plant, machinery and premises, were being delayed while the political and economic environments remained uncertain.

"Currently, decisions such as where to invest are being made on a short-term basis, which explains why the strong figures for this quarter are being led by improvements in the housing sector and increased consumption by households."

The US, which accounts for around a quarter of UK exports has provided an important outlet for British goods over the last year and until recently emerging markets such as China have bought British machine tools and cars in greater numbers.

Hopes that exports will continue to rise remain a dominant feature of business surveys, but analysts have warned that a slowdown in China while it deals with a property loan bubble and overcapacity in several key industries, could hit exports in the second half of the year.

The eurozone, which accounts for 40% of UK trade, is likely to recover after an 18-month recession, though at a slow rate and with the possibility of further political crises acting as a drag on confidence.

Anna Leach, the CBI's head of economic analysis, said: "Firms expect demand to improve both at home and abroad, and production to stabilise over the next three months. But manufacturers remain concerned about the impact of political and economic conditions overseas on external demand, reflecting ongoing uncertainty about the global economic outlook."

Powered by article was written by Phillip Inman economics correspondent, for The Guardian on Monday 5th August 2013 00.04 Europe/London © Guardian News and Media Limited 2010


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