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August 29, 2014

Business groups divided over interest rates

Business groups divided over interest ratesBusiness groups have responded to the news that two members of the Bank of England's Monetary Policy Committee (MPC) voted to raise interest rates in August – but there is no consensus on what would be good for the economy.

Earlier this month, minutes of the last MPC meeting showed that Ian McCafferty and Martin Weale voted for a 0.25% rise to 0.75%. However, the nine-member committee voted 7-2 to hold interest rates at 0.5%.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: “With inflation well below target and wage growth stagnating, any increase in interest rates at the moment would be premature. The economic recovery is still not secure and growth amongst UK businesses must be fostered in a low interest rate environment. The risks from raising rates too early are much greater than the risks of waiting just a little longer.”

However, the Institute of Directors (IoD) has called for rates to rise this year. James Sproule, IoD chief economist, said: “The IoD has called for rate rises to begin this year, aiming to reach a level of around 3% by the end of next year. The MPC argues that they are awaiting strong growth in wages before acting. However, we believe that monetary policy must be put back on a more normal footing first, before we begin to monitor inflation and other factors to see if further action is needed.”

Meanwhile, John Allan, national chairman of the Federation of Small Businesses (FSB), said: “If small businesses are going to continue driving economic growth, it is crucial that further rate rises are gradual. This will enable firms to plan ahead and keep the cost of doing business down.”

A new report on consumer credit trends by Verum Financial Research has found that that the “over-indebted household sector poses a systemic threat to the sustainability of the UK’s economic recovery”.

According to the research, significantly higher debt levels, which have grown from 90% of household disposable income in 1990 to 130% in 2013, mean that households are much more vulnerable to marginal increases in interest rates. Professor James Fitchett of Leicester University School of Management said: “The prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy.”

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