Chambers of commerce say interest rate rise would derail recovery

British businesses are calling on the Bank of England not to rush into an interest rate rise, warning that the recovery is not yet secure as a closely watched report on Tuesday shows a slowdown in exports.

The British Chambers of Commerce (BCC) says its latest quarterly poll of thousands of companies shows their performance slipped on key measures such as overseas sales and investment during the last three months when compared with a strong start to 2014.

The business group said its findings still pointed to a solid pace of growth for the UK, but were a reminder that the recovery was not entrenched and rebalancing the economy still had a way to run.

It warned against an early move to raise borrowing costs after recent comments from Bank of England policymakers have raised expectations that a hike could come before the end of the year.

"These results reinforce the case against the Bank of England making any hasty decisions on raising interest rates in the very short-term," said BCC director general John Longworth.

"By driving up the cost of credit for fast-growing firms, many of whom do not sit on the same healthy cash piles as their more established counterparts, early rate rises may mean more limited growth ambitions among the very firms we are counting on to drive the recovery.

"We must nurture the business confidence we are seeing at present by giving firms the security of working in a low interest rate environment for the foreseeable future – with eventual rises both moderate and predictable."

The survey of around 7,000 companies across manufacturing and services found that on the whole businesses reported conditions above long-run trends. Its balances, which represent the number of firms reporting an improvement from those reporting a deterioration in a particular area such as orders or hiring, were mostly stronger than their 2007 pre-recession levels.

But after an unusually strong first quarter, all the export and investment balances fell in the second quarter.

There was a mixed picture for jobs, with the balance deteriorating somewhat for manufacturing although still showing employment rising in the sector. The employment expectations balance also dropped.

For the much larger services sector, the jobs balance for the past three months rose but the employment expectations balance slipped back slightly.

The BCC said all the survey's confidence balances remained "relatively strong" but intentions to raise prices eased and concerns around interest rate rises rose.

Interest rates have been at a record low 0.5% for more than five years and while no economists expect any action at this week's meeting of the monetary policy committee (MPC), Bank governor Mark Carney has said the decision about when to tighten policy is "becoming more balanced".

After suggesting in June that a rate rise "could happen sooner than markets currently expect" and then days later downplaying chances of a move anytime soon, Carney has faced criticism for baffling businesses and financial markets. Some critics say the governor has effectively killed off his own "forward guidance" scheme, designed to give businesses clarity over the interest rate outlook.

The BCC's chief economist David Kern said it was vital the Bank went back to sending clearer messages.

"The monetary policy committee must restore the clarity of its forward guidance, and reassure business that rates will only start edging up if and when objective circumstances require such a move," he said.

Powered by article was written by Katie Allen, for The Guardian on Tuesday 8th July 2014 00.01 Europe/London © Guardian News and Media Limited 2010


JefferiesAnd the Best Place to Work in the global financial markets 2018 is...

Register for HITC Business News