Britain’s businesses are urging the Bank of England to leave interest rates on hold “well into 2016”, to cushion the economy against global turmoil, as rate-setters prepare to announce the result of their September policy meeting.
Publishing its latest quarterly economic forecast, the British Chambers of Commerce has upgraded its expectations of GDP growth but cautions the Bank’s nine-member monetary policy committee (MPC) against pushing ahead with tightening policy.
David Kern, the business body’s chief economist, said he now expects GDP growth of 2.6% this year, up from 2.3% in its last forecast; and 2.7% in 2016, up from 2.6%. He said that would make the UK one of the fastest-growing major economies. However, he urged the MPC to hold its fire.
“Global uncertainty – including the current situation in China, weakness in the eurozone, and the widely expected rise in US interest rates – could trigger further bumps in the road. Factors outside our own control reinforce the case for the Bank of England to keep interest rates on hold until well into 2016.”
When the MPC announces its monthly rate decision on Thursday, City experts will seize on any hint that the Chinese economic slowdown could push back plans to raise interest rates.
Mark Carney, the Bank’s governor, recently reiterated his expectation that a rate rise could become necessary around “the turn of the year”, despite the global market turmoil in recent weeks triggered by fears of a crash in China.
However, at its August meeting, just one of the MPC’s nine members, the ex-CBI economist Ian McCafferty, voted for an immediate rate increase, and the Quarterly Inflation Report suggested that inflation, which was 0.1% in July, could dip back below zero in the coming months.
The interest rate decision on Thursday will be announced alongside the publication of the meeting’s minutes, as part of the Bank’s new commitment to transparency.
Analysts will scour the minutes for any evidence that the Chinese stock market rout, and the roller-coaster ride that prompted the FTSE100 to lose 6% of its value in August, have unnerved policymakers.
Interest rates were slashed to their record low of just 0.5% in 2009, at the height of the global financial crisis, but with the economy now growing at a healthy pace, Carney has repeatedly made clear that borrowing costs must rise.
However, the most recent official data on Britain’s labour market suggested that the hiring boom has started to wane, with the unemployment rate from April to June higher than three months earlier.
Martin Beck, of the consultancy Oxford Economics, said the question marks over the health of the global economy, together with the recent strength of sterling, which could damage the UK’s export performance, meant he now expected a rate rise to be delayed.
“Along with August’s dovish minutes, the enduring strength of sterling and the merits of waiting until the US Federal Reserve has hiked rates (something we now expect to occur in December), recent developments all point to the first post-financial rise in UK interest rates coming later than previously expected. We have pushed our call back from Q1 2016 to Q2.”
This week’s meeting will also be the first for the new MPC member Jan Vlieghe, a former hedge fund economist. New recruits tend not to depart from the consensus in their early outings.
This article was written by Heather Stewart, for theguardian.com on Thursday 10th September 2015 06.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010