Industry pleads with Bank of England not to raise rates this week

Low risk of a wage-price spiral despite current inflation trends

Economics Editor,Sean O'Grady
Monday 04 April 2011 00:00
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Industry is urging the Bank of England's Monetary Policy Committee (MPC) to leave rates on hold at Thursday's decision-making meeting.

EEF, which represents employers in manufacturing, points to falling consumer confidence and " wage growth remaining remain subdued" as reasons for the bank to exercise caution.

Lee Hopley, the EEF chief economist, said: "The full extent of fiscal tightening has yet to make its mark and growth isdependent on a pick-up in private sectorcontributions from trade and investment.

Interest rates must remain on hold until much stronger evidence emerges of a healthier economy."David Kern, chief economist at the British Chambers of Commerce (BCC), added: "As long as there are no signs that the UK is at risk of a wage-price spiral, the MPC must hold its nerve.

Given the uncertainties facing the economy, the MPC should postpone interest rate increases until later in the year when the recovery is more secure.

"The worsening situation in the eurozone, Japan and Libya could have a negative effect on the global economy, which reinforces the case for the MPCtowait. The case for holding fire on interest rates for now is supported by ongoing serious uncertainties and concerns about the underlying strength of the UK economy and its ability to withstand the increasing fiscal squeeze".

Recently the three "hawks" on the committee that have voted for a hike in rates - Martin Weale, Spencer Dale, the chief economist at the Bank of England who wants to see a 0.25 percentage points rise to 0.75 per cent and Andrew Sentance, who has voted for a 0.5 percentage point increase - have reiterated their unease at the prospects of bringing price raises back to the 2 per cent target.

One other member of the MPC, Adam Posen, has consistently argued in favour of a further loosening of monetary policy via another dos e of "quantitative easing", adding to the £200bn already pumped into the economy, and has repeated his belief in his policy in recent days. In this four-way split of opinion, much thus depends on the views of "swing" members, and especially those of the governor of the Bank of England, Mervyn King. However, has found himself in a minority before onthecommittee, and its members are encouraged to take an individual line on policy.

The other committee members that have so far sided with the Mr King in seeing no case for change are the deputy governors Paul Tucker and Charles Bean and the Bank's executive director for markets, Paul Fisher.

Of crucial importance to the MPC will be any further evidence that the public's inflationary expectations - which have been rising steadily in the experience of higher day-to-day inflation - are translating into pricing and wage-setting behaviour.

So far the evidence suggests that a wages boom is very far from reality, but the latest numbers from Income Data Services (IDS) show a nudging up in pay norms, something that will be unwelcome to policy makers.

The Bank may also want to wait for the first quarter's GDP growth figures, to be published by the Office for National Statistics on 27 April.

Howard Archer, chief economist at Global Insight commented: "Even if interest rates do rise sooner rather than later, the probability remains that they will move up only gradually and stay very low compared to past norms, as policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze".

Ongoing substantial pressures on consumers are likely to limit both growth and inflation".The European Central Bank is also due to decide on rates this week and a hike there is thought likely.

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