Business disappointment at rates decision

Sections of the business community have expressed their disappointment at the decision of the Bank of England to keep interest rates on hold at 5 per cent this month.

Although there are signs that the economy is slowing down, the Bank’s Monetary Policy Committee (MPC) were clearly worried that inflationary pressures are still too evident to allow for a cut in the cost of borrowing.

While most analysts had been expecting the move, some business groups were urging a further cut in rates to help boost flagging growth.

David Kern, economic adviser to the British Chambers of Commerce (BCC), said: “We are disappointed but not surprised by this decision. After cutting rates in April, most analysts have predicted correctly that the MPC would be reluctant to cut rates again in May.”

Mr Kern went on to add, however, that the BCC believed the decision to be a mistake.

He said: “The MPC has missed a valuable opportunity to underpin business and consumer confidence and to limit the potential damage to the economy.

“We are aware that the MPC cannot disregard the inflationary risks arising from surging food and energy prices, but countering the acute threats to growth must be given a greater priority in the immediate future. We strongly urge the MPC to cut interest rates to 4.75 per cent in June.”

It was a view echoed by Stephen Robertson, director general of the British Retail Consortium: “I understand the Bank has the difficult balancing act of keeping inflation under control while sustaining the economy but financial indicators overwhelmingly point to a gloomy outlook.

“There’s little sign yet of the rate cuts since December having much effect. With interest rate changes often taking a year to work through, the sooner the Bank cuts again, the sooner and greater the relief for hard-pressed consumers and retailers.”

Ian McCafferty, the CBI’s chief economic adviser, took a more cautious approach: “The latest data shows the economy is slowing, albeit only gradually, and at the same time inflationary pressures continue to mount. So, the Bank faced a difficult decision, but it is no surprise that rates were kept on hold this month.

“While the housing market and linked activities are very weak, activity elsewhere is slowing, but is well short of recession. Meanwhile, energy and raw material prices continue to climb, meaning inflationary pressures are intensifying as producers are forced to pass these on.”

Date:9 May 2008