Midland business leaders are urging the Monetary Policy Committee to keep its nerve this week and hold interest rates at the historic low of 0.5 per cent.
Christine Braddock, president of Birmingham Chamber of Commerce and Industry said until the Government gets a clear steer at how the private sector is starting 2011, current interest rates should be retained.
The Bank of England’s Monetary Policy Committee meets on Thursday to consider interest rates, and is expected to continue historic lows.
Ms Braddock said: “Question marks still remain over the Midlands economy despite the Chamber’s recent QES survey which showed record high sales and full order books in the final quarter of 2010 in the service sector.
"However 26 per cent of businesses in the service sector cited business rates or corporate taxation as a hindrance to business growth. In the manufacturing sector, this figure is 23 per cent.
“There is no doubt that interest rates will have to rise at some point in 2011, particularly with rising inflation, due to surging prices for a range of commodities and the increase in VAT rates to 20 per cent.
“The Government will have to juggle the rise in inflation, currently at three per cent for the ninth month, against tightening fiscal policy. We cannot underestimate the challenges which lie ahead.”
The Consumer Price Index (CPI) measure of inflation rose to 3.3 per cent in November, driven by the rising cost of oil, clothes and food, and the Bank admits it could rise as high as four per cent by the spring.
But the Bank’s policy setters, who are tasked with keeping CPI at two per cent, would rather brave above-target inflation than risk tipping the economy back into a “double-dip recession”, said economists.
A further round of quantitative easing, or money printing, is also not expected because this would further add to inflationary pressures.
Howard Archer, chief economist at IHS Global Insight, said: “The Bank’s Monetary Policy Committee are now in a very difficult position.
“Although the UK market achieved very decent growth in the second and third quarters it is still in a very fragile state following the deep recession.
“We suspect most committee members will be reluctant to adjust policy until they get a clear idea of how the economy is reacting to fiscal policy being tightened from the start of 2011.”
Louise Bennett, the chief executive of the Coventry and Warwickshire Chamber of Commerce, said the Bank of England’s Monetary Policy Committee should leave rates at 0.5 per cent.
She said: “The mood is still mixed among businesses in the area – some are looking to 2011 with confidence while others are still nervous about the forthcoming year, particularly with public sector cuts starting to come through.
“If inflation was closer to target there would be no discussion about the possibility of rates going up but because they have been well above target for some time, it has to be considered.
“The MPC has to take that into account when setting rates but then balance that against what is right for the overall economy.
“At this stage, the business need for low interest rates outweighs the inflation figures – which have, inevitably, been skewed by changes to VAT over the past year-and-a-half.”
