‘Bank should soon stimulate economy’

Sep 5 2008 by Karen Dent, The Journal

BUSINESS leaders in the North East reacted with disappointment as the Bank of England left interest rates on hold at 5% for the fifth consecutive month.

As had been widely predicted, the Bank’s rate-setting Monetary Policy Committee backed away from reducing the cost of borrowing as it battled to contain soaring inflation and shore up the slowing economy.

Inflation is currently running at 4.4% – more than double the Government’s 2% target – and is forecast to hit 5% after the latest round of price rises by the leading power suppliers.

CBI assistant regional director Liz Smith said: “It clearly remains concerned about inflation, which is likely to rise to just over 5% in coming months.

“But as the autumn unfolds, the chances of a rate cut will increase, as the slowdown improves the inflation outlook for next year.”

Rising inflation is set against a backdrop of stalled economic growth between April and June, and the Organisation for Economic Co-operation and Development (OECD) predicted this week that the UK will be the only major economy to fall into recession this year.

North East Chamber of Commerce president Richard Bottomley said a bleaker picture had been painted than he believed was warranted.

But he added: “It does highlight the need for the MPC to help stimulate the economy in the near future.

“With inflation still on the rise, it was unlikely that a cut was on the cards this month, but we will be looking for a sharp cut in rates in the near future after inflation has stabilised.

“If the economy is in as dark a place as the Chancellor suggests, then businesses really want to see action taken to restore confidence and to stimulate economic activity.”

The latest set of industrial surveys published this week showed the UK’s manufacturing, construction and services sectors all continuing to shrink in August, despite a slight improvement on July.

Regional manager of the EEF manufacturers’ organisation Tony Sarginson said: “So long as inflation remains stubbornly high, the Bank will continue to face a tough choice.

“But mounting evidence of a stagnating economy means the case for further cuts is growing. I do think next month or the month after, we will be asking for an interest rate cut to boost manufacturing in the region.”

Meanwhile, the Chancellor’s gloomy comments that Britain is facing its worst economic crisis for 60 years has resulted in further falls of the pound against the dollar and the euro, while the plunging housing market and rising bills have further eroded consumer confidence.

Statistics from mortgage bank the Halifax suggest a record fall in house prices, down 1.8% for August, which has left the average home worth £174,178 – 12.7% less than a year ago.

The CBI last week said the high street had suffered a “summer to forget” as shoppers kept a tight hold of the purse strings, leading to record falls in sales volumes during July and August.