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April 01, 2011

Interest rates must not be raised in April, warns BCC

Revised government figures which revealed the UK economy is doing slightly better than expected are not a signal to raise interest rates, the British Chambers of Commerce (BCC) has warned, writes Clare Bullock.

According to updated ONS figures, the UK economy contracted by 0.5 per cent in the last quarter of 2010, not 0.6 per cent as previously published. The revision means that GDP in the fourth quarter of 2010 is now 1.5 per cent higher than over the same period in 2009.

British Chamber of Commerce chief economist, David Kern, said it was reassuring to know the underlying position wasn’t as bad as feared, but that the Bank of England should remain firm on interest rates so as not to destabilise the economy.

“We can be reasonably confident that the recovery will continue, and it’s important that we don’t do anything to derail it,” he said.

“The Monetary Policy Committee [MPC] doesn’t need to do anything,” added Kern. “If they raise interest rates when they can’t do much to change the inflationary situation, the only immediate effect will be to make a gesture. The MPC should just carry on and let the Government’s measures take effect.

“If it’s clear by the third or fourth quarter that the economy has absorbed the impact of the Budgetary measures, then it would be proper to start edging up interest rates,” he said. “The big measures are being taken by the Government’s fiscal policy – that is what will have the biggest impact on the economy.”

Commenting on the figures, the Confederation of British Industry (CBI) said they would not be altering their prediction that the UK economy will grow in 2011.

CBI chief economic adviser, Ian McCafferty added an interest rate rise was likely in the second quarter of 2011.

“Persistently high levels of inflation are a concern,” he said. “This makes it more likely that the Bank of England will need to start putting up interest rates from their record low level from the second quarter of this year.”