CBI warns against 'premature' rise in interest rates

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The Independent Online

The Bank of England must not extinguish "tentative signs" of a recovery in manufacturing with a premature increase in interest rates, the Confederation of British Industry said yesterday.

The CBI said its latest survey of factories showed businesses were cautiously optimistic that the beleaguered sector had finally turned the corner. Confidence improved last month with firms expecting the decline in both output and orders to come to an end, it said.

Companies are also growing concerned about skills shortage, which the CBI added to the evidence they are looking ahead to see how they will cope with an upturn.

A fifth of organisations said they were more optimistic than three months ago while a quarter said they were more gloomy. The balance of minus seven was the least negative since July last year.

Ian McCafferty, the CBI's chief economist, said: "This is an encouraging survey but it is too early to say whether firms really have begun to turn the corner. These are extremely early days so I would not want see [the Bank] risking that with a premature tightening of monetary policy.

"The first rise in interest rates is the one that has the most potential for psychological damage so a period of stability of clearly required."

Mr McCafferty said there has been many instances of a rise in optimism that had failed to translate into a boost in activity. But he said his cautious optimism was backed up by the feedback he has received from CBI members during a recent series of visits around the UK. "The anecdotal evidence is that the tentative signs may be better justified than in the past."

He believed the recent positive news out of the US, where the economy to be growing at an annual rate of 6 per cent, had also boosted confidence.

The survey showed concerns over a shortage of skilled labour had risen to its highest level since autumn 2001. This was reinforced by a separate result showing that companies planned to accelerate their spending on training for the first time since January.

Mr McCafferty said he believed this showed they were concerned about possible constraints on expansion rather than sounding "an alarm bell" over future wage inflation.

Despite this, businesses slashed an estimated 31,000 jobs over the three months to September and are forecast to axe another 36,000 in the final quarter of the year.

Analysts said the Bank would probably heed the CBI's advice at its next interest rate meeting. Simon Rubinsohn, chief economist at the fund manager Gerrard, said:"We do not believe the readings are sufficiently strong to justify taking any action in November."