Business leaders back 5% interest rate freeze

Aug 8 2008 by Iain Laing, The Journal

BUSINESS leaders have backed the Bank of England’s decision to freeze interest rates at 5% for the fourth month in a row.

The decision by the Bank of England’s Monetary Policy Committee (MPC) is likely to have been one of the toughest in recent times, with members having to balance deeper economic gloom with expectations of rising inflation.

Most economists believe rates will remain on hold for the rest of the year, although a rate rise cannot be ruled out as inflation may hit 5% this autumn, pushed up by the latest round of gas and electricity tariff increases.

The warning comes despite mounting signs of recession and gloom in the housing market. Britain’s biggest mortgage lender, Halifax, yesterday revealed that property values had fallen by 8.8% in the past year after sliding a further 1.7% in July.

Richard Bottomley, president of the North East Chamber of Commerce , said: “The price of oil has had a major impact on inflation in recent times and we are now starting to see this drop. This is good news for the economy at a time when economic growth is slowing and will have eased the pressure on the Bank of England to raise interest rates to counter rising inflation.

“The stability this brings is important as firms did not want to face a hike in rates at a time when they were redoubling their efforts to remain competitive.”

Liz Smith, assistant regional director of CBI North East said: “The latest data show the slowdown in UK economic activity gathering pace, and business and consumer confidence falling further. However, with inflation heading higher in the next couple of months, the Bank is right to leave rates on hold for the time being.”

Manufacturers, normally eager for a cut, yesterday said they accepted the decision. The manufacturing sector saw activity fall at its fastest pace for nearly a decade during July, according to figures earlier this week, which suggested gathering woes in the wider economy.

But Tony Sarginson, regional manager of manufacturers organisation EEF Northern, said: “They were quite right to hold the rate because of the inflationary pressures. Normally manufacturers would ask for a cut, but at this time the feedback I get is that the sector is coping well.”

Philip Shaw, chief economist at Investec, said: “We are not surprised that rates remained at 5% – we feel that with inflation rising over the next few months possibly to up to 5% in the autumn, the MPC was unable to give the economy any relief via lower rates, but we are happy it had resisted the temptation to raise rates.”

Meanwhile, the European Central Bank has kept interest rates unchanged at 4.25%, because of the economic slowdown. The ECB, which decides rates for the 15-nation euro area, raised rates in July from 4%.