Bank maintains freeze on interest rates

THE Bank of England’s Monetary Policy Committee today agreed to maintain its freeze on interest rates at 0.5%.

The committee also voted to leave quantitative easing at £200bn.

Business leaders in the West Midlands had urged the MPC to maintain its current policy in an attempt to sustain growth. Many said businesses emerging post-recession needed all the support they could get and with the impending VAT rise next month a period of stability would aid growth prospects.

Christine Braddock, President of Birmingham Chamber of Commerce, said: “Birmingham’s annual GVA is predicted to reduce by £735m by 2015, around 4% of economic output. This equates to an average decline in economic growth in the city of 0.9% a year over the next four years. So interest rates still need to remain unchanged.

“However, the Monetary Policy Committee will be forced into a rise soon as inflation remains at over 3%, a figure which has been retained for every month of 2010.”

Mike Ashton, chief executive of Hereford and Worcester Chamber who has succeeded Simon Topman as chairman of the West Midlands Chambers of Commerce, said:  “Manufacturing figures for October were better than expected but the volume of exports remains low.  

“Forthcoming spending cuts due to the rise in VAT in January will stifle economic growth.  Companies should take advantage of the weak pound and increase expansion through overseas trade.”

Ian McCafferty, CBI Chief Economic Adviser, said: “The recent data suggests the moderate recovery predicted earlier in the year remains on track, with export activity improving and domestic activity holding its own.
 
“At the same time, imported inflationary pressures remain acute, with global raw material prices continuing to edge upwards. In addition, after two years of significant private sector pay restraint, there is a likelihood of some firming in earnings growth into 2011.
 
“If current trends continue, by the spring I would expect the MPC to start to consider how and when to begin the process of moving monetary policy back towards a more normal footing.”

Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, said: “When interest rates fell to 0.5% in March 2009, many thought it was a temporary step but it could remain at that level for more than two years.

“There is a pull in both directions for the MPC. Inflation is higher than the target figure and the economy has grown this year but we have a VAT rise and the effects of the Government cuts to come.

“So we believe it is correct to maintain interest rates at this level until there are genuine signs of a sustained, long term economic recovery and it appears that the MPC will continue with this policy until that becomes apparent.”

Sara Fowler, Ernst & Young’s senior partner in Birmingham, commented: “We have seen some very mixed messages about the economy recently.

“The UK purchasing managers’ index for manufacturing reached a 16-year high in November, as a result of exports and businesses adding jobs in record numbers.

“Added to this, the positive performance of industrial production and manufacturing data underlines the ongoing strength of the sector, reflecting the benefits of strong export demand and a weak pound – which is great news for the Midlands with such a strong manufacturing base.

“But this up-beat picture was tainted slighted by the announcement on growth in the UK services sector, which was modest in the first two months of the third quarter.

“It is this uncertainty which has been underpinning the economy for some time and one of the reasons why interest rates need to remain low. At the very least stable interest rates provide some stability in an economy which is still clearly unbalanced.” 

Roger Bootle, economic adviser to Deloitte, said the decision was no surprise as the MPC was sitting “firmly on the proverbial fence” and he predicted the strategy would continue for several months to come.

He said his opinion was the committee was over-estimating the ability of the economy to withstand the fiscal squeeze and that further quantitative easing (QE) was likely next year.

“Admittedly, the past few weeks have brought better news on the economic recoveries both here and abroad. But while industry is doing well, the recoveries in the much bigger services and consumer sectors seem to be struggling. The recovery in consumer confidence seen in the first half of the year has certainly stalled. And the news on the housing market just keeps getting worse.

“Meanwhile, the OBR’s downgrade to its 2011 and 2012 GDP growth forecasts was hardly a ringing endorsement of the Chancellor’s view that the economy can get through the looming fiscal squeeze unscathed,” he said.