Business stoical about decision to keep interest rates on hold

4 September 2008

Business groups have expressed a lack of surprise at the Bank of England’s decision to keep interest rates unchanged at 5 per cent this month.

This is the fifth consecutive month in which the Bank’s Monetary Policy Committee (MPC) has opted maintain the current cost of borrowing.

The Bank faces the dilemma of a slowdown in the economy and rising inflation.

By not reducing rates, it runs the risk of extending the downturn, while cutting them could allow the cost of living to spiral.

Ian McCafferty, the CBI’s chief economic adviser, believes that the Bank still harbours concerns about inflationary pressures within the economy.

However, Mr McCafferty also said that said the dampening of economic growth should see a peaking of inflation later in the year: “As the autumn unfolds, the chances of a rate cut will increase, as the slowdown improves the inflation outlook for next year.”

Other business groups said they expected the decision but urged the Bank to be vigilant and seize the earliest chance to cut rates.

Stephen Robertson, the director general of the British Retail Consortium, said: “With economic growth at a standstill but inflation double the Bank’s target rate, no change is the right decision for now.

“But, with BRC shop price figures suggesting inflation may be nearing its peak and increasing fears of recession, the point at which the balance tips in favour of a rate cut is getting closer. The Bank should not risk making a difficult situation worse by delaying a rate cut any longer than is absolutely necessary.”

David Kern, economic adviser to the British Chambers of Commerce, commented: “The MPC’s widely-anticipated decision today, to keep rates on hold at five per cent, is understandable. In the face of rising inflation, the MPC must maintain credibility.

“But the MPC cannot ignore the fact that the UK economy is very likely in technical recession already, and there are distinct risks that the situation would worsen. A major recession can still be prevented if prompt action is taken. The MPC should start cutting interest rates promptly in the next few months, as soon as UK inflation peaks.”

However, Nick Palin, the director of finance at the Forum of Private Business, saw the move as missed opportunity to encourage small firms.

Mr Palin said: “A rate cut would have boosted small firms’ confidence, as well as that of consumers, and would have helped them trough the difficult times that they face in the current credit crunch.

“Instead, small firms will feel disappointed and abandoned yet again, as they have done for the past five months.”