Business pressure for rate cuts puts Bank on the spot

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BUSINESS ORGANISATIONS are urging the Monetary Policy Committee to hold or even reduce interest rates after its meeting this week, even though City economists are warning it is only a matter of time before rates have to increase.

All of the employers' organisations contacted by The Independent said there was scope for rates to fall further. But figures at the end of last week showing the economy expanding faster than anticipated led the financial markets to predict the cost of borrowing will have to rise to 5.25 per cent by September and again by the end of the year.

Economists are also concerned about rising commodity prices, especially oil, and the risk the pound could fall suddenly, boosting import prices.

"Our members would welcome a further cut of half a point to 4.5 per cent, or even lower," said Stephen Alambritis of the Federation of Small Business. "Small firms are paying 8 to 9 per cent for their money, and another rate cut would put pressure on the banks to pass some of it on."

The Confederation of British Industry also said the next move in rates should be downward. It argues that inflation pressures are weak and the strong pound is still causing problems for manufacturers.

Ian Peters, deputy director of the British Chambers of Commerce, said: "It is too soon to start thinking about raising interest rates. There is welcome underlying growth in the economy, but it is not all that strong." And Graeme Leach, chief economist at the Institute of Directors, said: "There is a real possibility of a further rate cut, although we do not consider it essential. Wage settlements are slowing and we can be relatively relaxed on the inflation front."

Some economists predict the MPC will face an increasingly severe dilemma as the year goes on, with underlying inflation heading for the bottom of its target range at the same time that stronger growth will be fuelling future inflationary pressures.

The influential National Institute for Economic and Social Research predicted last week that, with growth picking up to 2.5 per cent in 2000, the target inflation rate would be heading past 3.1 per cent, the top of the range, by the end of the year.

This week's purchasing managers' surveys on manufacturing and services and the CBI's monthly survey of high street sales are expected to show fresh signs of recovery across the board, confirming other evidence that the economy is once again picking up momentum.

A report published at the weekend warned of a "real risk that with fears of recession and property collapse removed, the housing market could overheat." The warning from Ernst & Young's Item Club, based on the Treasury's own economic model, comes in the wake of many signs that house price inflation is accelerating. The report thinks the danger will probably be avoided, but even so sees no scope for a reduction in interest rates from 5 per cent.