Inflationary pressure threatens manufacturing growth warns Bailey

ANY move by the Bank of England to raise interest rates could seriously hamper attempts by UK manufacturers to sell their goods abroad, a Midlands academic has warned.

Professor David Bailey, of Coventry Business School, said the relatively weak value of Sterling made UK goods much more appealing abroad. However, if inflationary pressures increased then this could change.

Latest manufacturing figures show the sector is expanding at its fastest rate since records began nearly 20 years ago, although this is from a very low base.

Prof Bailey said the situation was pretty much as predicted 18 months ago when the recession was at its worst.

However, with rising commodity prices and increasing energy and fuel costs, inflationary pressures are mounting. The Bank of England’s Monetary Policy Committee meets next week to discuss interest rates and speculation is growing that if the committee doesn’t change the rate this month then it is only a matter of time before its does.

“We may see further calls for the Bank of England to raise interest rates. Sterling, in turn, would strengthen on the expectation of an interest rate rise,” said Prof Bailey.

Such a move would make British goods more expensive abroad and threaten growth as customers looked elsewhere for more competitive suppliers; even if this did have the desired effect of checking inflation.

“Even the Bank’s governor Mervyn King said recently that inflation was more of an immediate concern than growth, warning that households were undergoing the worst squeeze on finances since the 1920s,” added Prof Bailey.

“If the Bank raises rates too slowly there is a danger that inflation will take off and become entrenched. But if it raises rates too quickly we risk derailing an already stuttering recovery and entering double dip territory.

“The government claim that the positive manufacturing figures back up its belief that the economy would rebalance with the private sector creating jobs as public sector jobs are lost. However, I’m not so sure that the manufacturing sector will continue to expand so rapidly after the first quarter of this year.”

Prof Bailey said the number one priority at the moment was to create jobs and to cut the economic deficit.

“Given the scale of fiscal cuts we’re about to face, the Bank will need to hold its nerve and keep monetary policy loose for as long as possible so as to keep the economy moving,” he said.