Interest rate decision no surprise to business

BUSINESS leaders in the West Midlands said the Bank of England’s decision to keep the cost of borrowing at its historic low came as little surprise.

The Monetary Policy Committee yesterday agreed to keep the base rate at 0.5% – meaning the rate has remained unchanged for 12 months.

The Committee also said it would not be pumping any more money into the economy through the process of Quantative Easing.

The Bank halted QE last month having injected around £200bn into the economy to sustain the ongoing recovery.

Ronnie Bowker, senior partner at Ernst & Young in Birmingham, said: “The economy is still showing signs of weakness, and as such there was no justification for a hike in interest rates at this time.  

“There is still far too much uncertainty and fragility in the economy and I predict interest rates will stay where they are for some time – even until the end of the year – if the current economic climate does not change.”

Mark Smith, regional chairman at PricewaterhouseCoopers in the Midlands, said that given the recent mixed bag of economic data and against such an uncertain political and fiscal backdrop, the decision to keep both interest rates and quantitative easing on hold was always going to be a tough call.

“However, despite some concerns over rising inflation, a tightening of monetary policy still seems a way off given the fragile nature of the economy.”

“Looking ahead, there have been strong signals from the committee that they are still prepared to pump further funds into the economy through quantitative easing,” he said.

Mr Smith said this flexibility would be welcomed by Midlands businesses and consumers, however, he added with the continued uncertainty surrounding the economy, it was likely to be a while yet before the MPC opted for this step.

Birmingham Chamber of Commerce and Industry said the decision to keep rates low would help businesses grow.

Katie Teasdale, head of BCI policy, said: “Low rates will help business growth, which is crucial if we are to exit the recession convincingly. Growth of 0.3% in Q4 appears to have been built upon in Q1 with improved export figures.”

However, she warned that low interest rates alone were not enough, especially as the threat of creeping inflation may force rises in the medium term.

“The MPC’s decision not to further extend Quantitative Easing is reasonable because we need to let the extra monies flush through the system. However, there is still an issue over bank lending which needs to be addressed.

“The government must play its part and the approaching election is no excuse for paralysis. We need to see a slew of business-friendly measures, the most important of which is the cancellation of 1% rise in National Insurance contributions scheduled for April next year,” she said.

The increase would cost UK businesses over £14bn and will severely discourage investment and job creation at the worst possible time, she added.

Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, said: “The longer rates stay at this level, the greater the pressure there will be for the Bank to start moving them back up – especially when inflation has been rising.

“But we have been content to hear that the Bank recognise that inflation is going up because of exceptional circumstances and have not pressed the panic button.

The minutes of yesterday’s meeting will be released later this month, however, it is thought the MPC was unwilling to place any undue pressure on the fragile economy, which grew by just 0.3% in the final three months of last year.

Although this was ahead of expectations, experts are still sceptical about how sustainable the recovery is given the continuing difficulties in the economy and the threats posed to growth by rising inflation and fuel costs.

Sonya Kapur, investment analyst at BNP Paribas Real Estate, said she expected the bank rate to stay at this level throughout most of 2010.

“Revised figures for GDP in Q4 to 0.3% have bought fresh hopes that the economy will continue its growth path that will lead to a stable, steady recovery,” she said.

“The MPC’s decision, as always, depends on the strength of the economy and although there are positive signs, it is still too early to even contemplate hiking interest rates up.”