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Business groups support Bank's interest rate decision

 
General News |  11/07/2011
Business groups support Bank's interest rate...Two leading business lobby groups have backed the decision to keep interest rates on hold at 0.5 per cent for a further month.

As expected, the Bank of England's Monetary Policy Committee (MPC) voted to keep the base rate at its historic low for a 28th consecutive month, in a bid to encourage greater economic growth in the UK.

Both the British Chambers of Commerce (BCC) and Confederation of British Industry have welcomed the freeze, which comes despite growing fears over the high level of inflation.

David Kern, chief economist at the BCC, said that given the fragility of the recovery, and the acute pressures facing firms and individuals, the MPC was right to reject calls for early rate increases.

"With UK inflation at 4.5 per cent, and set to increase further in the next few months, the MPC is naturally concerned," he stated.

"But tightening policy in reaction to higher utility prices and internationally generated inflation would be a major mistake."

Mr Kern said that premature rate increases, at a time when the government is tightening fiscal policy through its deficit-cutting programme, could damage jobs and growth.

"As long as domestic wage pressures remain muted, the MPC should avoid any action that increases risks of an economic setback," he added.

The economist said that if the economy weakens further, the committee should consider increasing the quantitative easing programme above its current £200 billion level.

Ian McCafferty, chief economic adviser at the CBI, said the mixed messages delivered by recent economic data has put the MPC in a difficult position.

"Inflation expectations are on the rise, raising questions about the Bank's anti-inflation credibility, but activity continues to be patchy, with one-off factors such as the disruption from Japan and the extra bank holiday clouding their assessment of the underlying strength of the economy," he stated.

Mr McCafferty said the fine balance will continue in the coming months, but with inflation likely to hit five per cent by the autumn, a shift in policy should not be ruled out before the end of the year.

Posted by John Lynes

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