CBI demands an end to rate rises as growth cools

Click to follow
The Independent Online

The Bank of England should leave interest rates on hold until next year to give consumers a breathing space in the run-up to the crucial Christmas trading period, the CBI said yesterday.

The Bank of England should leave interest rates on hold until next year to give consumers a breathing space in the run-up to the crucial Christmas trading period, the CBI said yesterday.

The employers' lobby group cut its growth forecast for next year, warning that soaring oil prices could depress spending and businesses' profits and investment.

Its message came as separate figures showed the number of new mortgage approvals plunged more than 20 per cent last month, suggesting the housing market was cooling rapidly.

Digby Jones, the CBI's director general, urged the Bank to slacken the pace of rate rises, warning the Monetary Policy Committee not to "overdo the medicine". He said: "I would like to see stability of interest rates until the end of the year. There is an argument to say keep them on hold at 4.75 per cent to see what the high street does at Christmas."

He acknowledged, however, that there would probably be at least one more rate rise to 5.0 per cent, most likely in November, which would probably mark the peak.

The CBI cut its forecast for growth in 2005 from 3.0 to 2.8 per cent, below the Government's 3.0 to 3.5 per cent target range. It trimmed its forecasts for household spending and exports because of the impact of a sustained oil price well above $30 a barrel on the London market. Brent crude fell through $40 yesterday for the first time in three weeks.

Mr Jones said the economy, which is forecast to grow 3.4 per cent this year, had responded much more robustly to this year's surge in oil prices than it had 10, 20 or 30 years ago.

But he said: "The big issue is other countries where their economies are not so robust and who will not be buying our goods, and that will impact on our economy. High petrol prices will lessen [household] disposable income."

Mr Jones said a slowdown in consumer spending would hit VAT receipts, while the squeeze on businesses' profit margins meant corporation tax revenues would disappoint the Treasury's ambitious forecasts.

"Profitability is under the cosh so they won't get the dividend income and the Chancellor does not get his tax receipts," he said. "He won't put up taxes at election time so he is on the border of breaking his golden rule on borrowing."

Despite Mr Jones' gloomy warnings, the CBI's latest manufacturing survey showed factory orders at a six-year high this month. Economists in the City said the strength of the survey undermined Mr Jones' call for a rates freeze.

George Buckley, an economist at Deutsche Bank, said: "Overall, this is an upbeat survey, suggesting that some of the concern about the latest soft patch of data may be overdone."

But the British Bankers' Association said the number of new loans to buy a home slumped in July by more than 20 per cent compared with both June and July 2003. Economists said the fall was a sign homebuyers had responded to the Bank's warnings but said the MPC might be concerned by the scale of the retrenchment.

Malcolm Barr, a UK economist at JP Morgan, said: "If you were not worried about the potential for an abrupt correction in UK house prices before today, you should be now. "If the indications on housing activity remain as worrying as this BBA release, then another move higher in rates in November comes into question."

Comments