RATE RISE DECISION CORRECT BUT MPC MUST NOT OVER REACT NEXT TIME AROUND
10/05/07 | 12:05
"The decision to raise the base rate was necessary in order restore credibility after the recent shock increase in CPI inflation to 3.1%. But the three interest rate increases implemented since August 2006 are already having harmful effects on British business. Today’s fourth increase in rates will inevitably exacerbate the pain and heighten future risks.
“The worrying upsurge in UK inflation has been bigger than anticipated; it has also been bigger than comparable inflation upturns in other G7 economies. Against this background, one cannot be complacent. The MPC has to be firm. But it is important not to over-react to transitory developments. The Bank of England and the markets expect almost unanimously big falls in inflation later this year, even without today’s move. There is no hard evidence so far that either UK inflationary expectations, or wage settlements, are accelerating.
David Kern concluded: “Inflation is a threat, and we accept that the MPC may have to take further action. But there is a danger that concern over recent events would generate pressures on the MPC to go over the top, and would result in damaging monetary overkill. UK disposable incomes are being squeezed, spending is set to decelerate, and growth will inevitably slow. At this stage, calls in some quarters for further Bank Rate increases in the near future are misguided and potentially dangerous. Having acted today, there are powerful arguments for the MPC to wait before raising rates again, so as to avoid damaging the economy unnecessarily. Previous interest rate increases must be given more time to work.
ENDS
MEDIA CONTACT:NOTES TO EDITORS:The British Chambers of Commerce (BCC) is the National Voice of Local Business.
The BCC sits at the heart of a powerful nationwide network of Accredited Chambers of Commerce serving business across the UK, which employ over five million people.