Business leaders in the West Midlands have warned against an early rise in interest rates if unemployment falls to seven per cent in the first half of this year.
Some experts claim interest rates should be held at 0.5 per cent until squeezed real-term wages begin to grow, with predictions that a seven per cent unemployment rate – at which the Bank of England said it would increase interest rates – is looming.
Finance and manufacturing chiefs in the region urged the Bank’s Monetary Policy Committee (MPC) to avoid choking the recovery by acting too hastily on rates, as export-led growth would be harmed by rising interest rates.
Lord Kumar Bhattacharyya, founder of WMG, the manufacturing arm of Warwick University warned that investment at home was the key to exporting abroad.
Speaking in the House of Lords, Post columnist Lord Bhattacharyya said: “We cannot rely just on banking or on our aerospace industry.
“For our businesses to grow they must succeed in export markets as well as at home.
“The first step to achieving this is a competitive exchange rate. For many years, British exports were strangled by high sterling, and we must not let that happen again.
"The Bank of England has a major role to play by not rapidly increasing interest rates.
“Stable exchange rates clear the way for government to help create an innovation framework that helps businesses develop their product base. This is the way to sustainable growth.”
The EY Item Club report predicted this week that unemployment will fall below seven per cent in the first half of 2014, but that wages will grow only 1.8 per cent in 2014, before rising by 2.7 per cent in 2014, and 3.5 per cent the year after.
That could leave the Bank in a quandary, having previously issued a guidance policy which says it will not consider a rate rise until unemployment fell to seven per cent.
Policy makers have stressed the threshold is not an automatic trigger, and will instead simply mean a rate hike can be considered.
The Item Club cautioned against raising interest rates too soon before real wages had shown an improvement, or risk “choking off the fragile consumer-led recovery”.
The group added that the BoE Monetary Policy Committee, which sets interest rates, should supplement a forward guidance threshold with an additional measure of wage growth – it also said the 7 per cent unemployment marker should be lowered.
Senior EY partner Sara Fowler said that the nature of the recovery will force inactive businesses to finally take action.
She said: “Following a long period of hibernation, where risk-averse managers focused on preserving cash, business confidence is now slowly returning. Now is the time for businesses to look at putting their investment plans into action.
“The winners will be those who get the timing right. With growing confidence, high cash balances and increased availability of finance, businesses that wait too long will run out of road and find themselves acquisition targets.”
Earlier this month, a snapshot of opinions of the UK’s top economists conducted by the BBC found all but one of the 28 economists polled thought rates would still be 0.5 per cent at the end of 2014. More than half predicted the first rise in the second half of 2015.
On the economy as a whole, the EY Item Club said consumers would continue to propel growth, and that UK GDP would expand 2.7 per cent in 2014 – up from 1.9 per cent in 2013.
Consumer spending, despite slow wage growth has been regarded as a driving force for the UK economy in the past 12 months.