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No UK Rate Rise Until Recovery Secured, Bank Told

Monday, 30 May 2011 | 6:10 AM ET

The Bank of England (BoE) was warned by the British Chambers of Commerce (BCC) on Monday that raising interest rates before November risked damaging the recovery of the UK economy.

Governor of the Bank of England Mervyn King
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Governor of the Bank of England Mervyn King

The Bank should wait until the recovery was more certain and more stable, David Kern, chief economist at the BCC told CNBC.com as the organization published its latest economic forecast which revised down economic growth by 0.1 percentage points to 1.3 percent.

Kern told CNBC.com the BCC believes the UK central bank could press ahead with an interest rate rise in August in order to deal with rising inflation but said he organization was against such a move.

“Our view is they [the Monetary Policy Committee] will put interest rates up in August. We’re not saying they should put them up, we think they should postpone, but we think they will put them up in August and we don’t think it’s a good idea,” he said.

Kern added that he believed the UK economy was “still too fragile.”

“We’re not saying the economy is going to fall back into recession but we think it’s too early at the present time [to put up interest rates],” he said.

“The government is pursuing quite forcefully a budget consolidation programme. We think they should continue to do so, we don’t think they should stop but to give it [the recovery] a chance to succeed.”

Higher Inflation

The BCCrevised down its March growth expectations for the UK economy in 2012 as well, from 2.3 percent to 2.2 percent.

The respected business group also raised its forecasts for annual consumer price inflation saying that it would remain at 4.5 percent for the rest of the year falling to 2.7 percent in 2012 - still above the BoE's target of 2 percent.

It blamed lower than expected GDP growth in the first quarter and higher than expected inflation adding inflation would most likely force the BoE’s hand into raising interest rates.

The BCC predicted the Bank would act as early as August despite most market analysts now believing the Bank will leave interest rates unchanged until the autumn.

The organization said it now believed the Bank of England would have to take tougher action against interest rates because it did not raise them in March adding it believed they would reach 1 percent by the end of 2011, and 2.75 percent by the end of 2012.

The BCC said it expected a modest increase in unemployment of around 150,000 over the 15 months to the middle of 2012.

But it said it expected there would be a slightly lower jobless level by that time overall saying unemployment would peak at 2.6 million rather than the 2.65 million as it had previously predicted in March.

Export-Led Recovery

Kern said higher interest rates would be damaging to the economic recovery because they would send a psychological message that people needed to tighten their spending, would hurt homeowners and would push up the pound's exchange rate.

“We want an export-led recovery, so we have to give it a chance. We don’t want to exaggerate we don’t want to say putting up interest rates is going to be a calamity. We don’t like inflation and we accept that there will have to be an increase in interest rates but we think we should wait a bit. We think the mood is changing, we think the Bank of England is generally uncertain itself,” he added.

The downward revision to the BCC’s UK economic growth forecast comes less than a week after the Organization for Economic Cooperation and Development (OECD) warned the coalition government it risked derailing the recovery by cutting public spending too far too quickly.

The OECD revised down is growth expectations by 0.1 percentage points from 1.5 percent at the end of the first quarter to 1.4 percent now. It had originally forecast GDP growth of 1.7 percent for 2011.

The most recent minutes of the meeting of the Monetary Policy Committee of the Bank of England showed the committee split three ways over whether to increase interest rates or not.

Outgoing MPC member Andrew Sentence voted to increase interest rates by 50 basis points, while Spencer Dale and Martin Weale voted to increase rates by 25 basis points. The MPC will announce its next rate decision on June 9.