Bank urged not to carry out rates 'overkill'

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The Independent Online

Business leaders yesterday urged the Bank of England not to embark on interest rate "overkill" as they published a survey showing that a mixed performance by manufacturers had marred an otherwise robust economic recovery.

Business leaders yesterday urged the Bank of England not to embark on interest rate "overkill" as they published a survey showing that a mixed performance by manufacturers had marred an otherwise robust economic recovery.

The British Chambers of Commerce said the economy had been driven by marked growth in the services sector in the second quarter of the year.

But it said growth in manufacturing was only "adequate with setbacks marginally outweighing gains". Confidence in future levels of sales and profits fell to a 12-month low in both sectors.

The BCC said the survey showed little sign of major recruitment difficulties or upward pressure on pay levels despite the current record levels of employment.

David Frost, director general of the BCC, said it suggested the climate for business was becoming more difficult as the recovery progressed. "The clear message is that businesses need supportive policies from the Government," he said. "Higher interest rates, higher taxes and excessive regulations remain serious potential threats."

David Kern, its economic adviser, said concerns over inflation and interest rates had risen while a fall in confidence in both sectors was "a potential warning". He said: "Businesses need stability and low inflation and we support the Bank in its efforts but we are concerned that the focus on house prices may results in damaging interest rate overkill."

Mr Kern said he hoped the Bank would revert to its pattern of raising rates every three months after ordering two consecutive rise in May and June, the first such move for four years.

Analysts in the City said the survey showed little sign of inflationary pressure although the overall strength of growth would justify a rate rise next month.

Malcolm Barr, UK economist at JP Morgan, said: "While the message on the growth momentum should leave no doubt that the direction of rates remains upwards, the consequent build-up in inflation pressure is very modest."

Official figures this week showed that wage growth fell unexpectedly in May while inflation in June was still well below the Bank's 2.0 per cent target.

The details of the BCC survey showed growth in domestic sales for services firms rose to a seven-year high while new orders jumped to a four-year high.

Manufacturers' sales and orders were at a much lower level although they also rose to seven- and four-year highs respectively.

The downside of the BCC survey was that it showed business confidence had fallen in both sectors as concerns over inflation and interest rates rose.

Meanwhile house prices fell last month, according to a survey by the National Association of Estate Agents, which said there were clear signs the market was slowing.

It said the price of the average home dripped by 0.2 per cent in June as vendors accepted a low proportion of the asking prices.

Richard Hair, the NAEA's president, said: "The market is definitely turning as the natural levelling out we have been expecting starts to take effect."

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