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February 18, 2011

May interest rate rise “a risky move”, says BCC

Increasing interest rates too soon would put pressure on businesses and individuals, the British Chambers of Commerce (BCC) has warned, after inflation rates rose again in January.

The UK Consumer Prices Index (CPI) annual inflation rate reached 4 per cent last month, up from 3.7 per cent in December, partly due to the VAT rise and the continued increase in crude oil prices. Economists estimate that the base rate may now rise as soon as May.

The Bank of England opted again this month to maintain rates at 0.5 per cent – after a record 23 months without change.

BCC chief economist, David Kern, said that if the fragile UK economy shows signs of weakening, any interest rate rise should be delayed.

“Due to the inflation rise, it now looks as though the Bank of England will put up interest rates in the second quarter,” he said. “This would dampen the economy and it would be a risky move. The rates will have to go up some time this year, but they should wait until the impact of the austerity plan has been absorbed – perhaps June, July or even August – as we just don’t know yet how it will hit us.

“Like everyone, small businesses need to keep an eye on cashflow, and ensure they aren’t over-exposed to risk,” added Kern. “But they shouldn’t miss out on the opportunities that low interest rates offer, and they should look at their own particular markets. For example, those in the manufacturing sector and those that export can thrive if they manage it well.”

Prior to the inflation figures being released, the Bank was confident that the rise would be temporary and that there would be no need for an interest rate rise.

However, at a press conference following publication, Bank of England Governor, Mervyn King, said that inflation is higher than the Committee expected three months ago.

“The Bank’s Monetary Policy Committee judges that measured inflation will fall back next year,” he said. “But the extent to which it will do so is uncertain, and there are large risks in both directions. The Bank will continue to set policy to balance the upside and downside risks to inflation in order to meet our target in the medium term.”