Businesses urge MPC to hold nerve as inflation stays static

BUSINESS leaders have urged Bank of England policymakers to maintain their stance on interest rates after new figures showed inflation holding steady in May.

Many were worried that a rise in inflation could put pressure on the Monetary Policy Committee to raise interest rates above 0.5%.

However, the latest figures showed CPI inflation stayed at 4.5% in May.

Birmingham Chamber of Commerce Group said the picture on how firms in the area were coping with rising inflation would become clearer next week when the organisation publishes its latest quarterly economic survey.

Chamber president Christine Braddock said:  “Businesses have little choice but to freeze pay, which in turn leads to less spending by consumers producing a vicious circle.  Fuel has gone up by 40% in the last year and food price have increased, flour nearly doubling.

“Interest rates can’t go any lower and our members continue to inform us that they are benefitting from the current rates. We do however recognise that interest rates will need to rise at some point later this year.”

The approach was shared by the Coventry and Warwickshire Chamber of Commerce.

Chief executive Louise Bennett said: “Inflation is high but not spiralling out of control. We expect it to stay above the Bank’s target this year and then start to fall in 2012.

“Rising fuel and commodity prices obviously hit businesses but there is little evidence to suggest high wage inflation is now coming into play, which would obviously affect companies.

“The biggest risk to business is the Bank of England suddenly ramping up interest rates to counter inflation. We don’t think that would work because many of the factors for UK inflation are international rather than domestic.

“And, with Government austerity measures beginning to take hold, a rise in interest rates would risk the fragile economic recovery.”

John Rider, West Midlands’ chairman of the Institute of Directors, said: “Clearly we still have a short-term inflation problem but the medium term threat is deflation.

“The overall story hasn’t changed. Economic weakness, spare capacity, slow wage growth, VAT effects and anaemic money supply all suggest that inflation will fall back very sharply in 2012.”

He added: “The softening in the economy already underway is sufficient to bring inflation under control; we do not need a tightening in monetary policy. Indeed if current money supply trends continue we will need to introduce a second round of quantitative easing.”

Nida Ali, economic advisor to the Ernst & Young ITEM Club, said: “That inflation didn’t increase further in May is a good sign for the Bank of England and adds some credibility to their loose monetary policy stance. However, the upward and downward pressures on monthly inflation tend to be very volatile and don’t alter the broader picture that inflation will remain elevated throughout this year. With utility companies intending to increase prices of heating and energy, we are likely to see inflation rising further over the coming months.”

She said the club expected interest rates to be held until at least November.