Cut in interest rates urged to lift economy
Oct 12 2007 by Iain Laing, The Journal
BUSINESS leaders have renewed calls for an interest rate cut, claiming fresh evidence of a faltering UK economy.
Confidence over prospects among manufacturers has declined in the past three months, along with domestic and export sales in the services sector, the British Chambers of Commerce’s latest quarterly survey said.
David Kern, the BCC’s economic adviser, called on the Bank of England’s Monetary Policy Committee (MPC) to cut rates from 5.75% next month.
He said: “An early cut in interest rates will reduce the need for larger and riskier cuts later on.”
An overall balance of 35% of manufacturers expecting higher profits reflects the lowest confidence levels for a year, according to the BCC. Sentiment is weakest among medium-sized and larger firms.
Among services companies, domestic sales balances fell 7% to 29%, while the sector’s export performance slipped for the third quarter in a row.
But economists highlighted other aspects of the BCC’s survey – particularly a rise in the balance of manufacturers intending to raise prices and invest in their businesses – and said that Bank of England policymakers were unlikely to act soon to cut rates.
The MPC, which is charged with keeping Consumer Price Index inflation at 2%, has been worried over continuing pricing pressures in the manufacturing sector. Official figures earlier this week showed input costs jumping to 3.2% in September after a spike in oil, while manufacturers also shrugged off five recent rate hikes to increase output by 0.4% in August.
Howard Archer, Global Insight chief UK economist, said: “The survey does not appear to be nearly soft enough to give the Bank a significant prod towards cutting interest rates as early as November.
“In fact, we suspect that the BCC survey will reinforce the Bank’s concerns that companies’ pricing power and capacity constraints still pose a significant inflationary threat.”
Economists now believe that an early rate cut – called for during the recent credit crunch – is off the cards until early next year until there is clearer evidence of an impact on the underlying economy. JP Morgan economist Malcolm Barr said: “We doubt the BCC’s calls will be heeded.”
Although services firms are more confident than their manufacturing counterparts, the sector is also scaling back business investment and employment expectations, the BCC survey added.
Mr Kern added: “Though many manufacturing balances are strong, most service sector balances show disappointing falls. Given the weight of services in GDP, the third quarter results point to weaker overall performance.”
