CBI says strong pound and rising rates are driving investment overseas

CONCERN OVER rising interest rates and a soaring pound could be driving British business investment overseas, the Confederation of British Industry warned yesterday.

CONCERN OVER rising interest rates and a soaring pound could be driving British business investment overseas, the Confederation of British Industry warned yesterday.

Although confidence in the manufacturing sector is at its highest in four years, this has failed to feed through to an increase in investment in the UK, the CBI said.

The business organisation said it was increasingly worried that the "less secure" economic conditions in the UK were discouraging manufacturers from spending on new plants and offices.

Nick Reilly, Vauxhall's chairman, who also heads the CBI's economics committee, said he was worried that manufacturers' investment plans were so "weak". "It is clear that the improvement in business confidence has not fed through to manufacturers' capital investment plans," he said.

"In some cases the intended investment may be being directed abroad. If they are more secure about conditions elsewhere [than] in the UK, that might prompt them to satisfy the increasing economic growth in Europe and other markets by investing elsewhere."

The Institute of Manufacturing said it was not surprised the data was pointing to a flight of capital spending. Michael Kitson, its economic adviser, said: "This immediate problem reflects a more long-term structural problem in the UK economy of a failure to invest in manufacturing."

The CBI yesterday urged the Monetary Policy Committee not to raise rates at its monthly meeting next week, saying it would kill the "fledgling recovery" in the manufacturing sector. The call came despite its latest industrial trends survey, published yesterday, which showed business confidence rose for the fourth successive quarter.

Optimism is at its highest level since April 1995 while export optimism is at its highest since January 1997. However, the rise in business confidence boosted sterling as analysts said it fuelled the argument for a rate rise. Sterling rose to a one month-high against the euro, which fell to 64.06p.

Jonathan Loynes, an HSBC economist, said an acceleration in manufacturing output removed "a potential impediment to higher rates" and forecast a 0.25 per cent hike next week.