Encouraging economic activity and investment needs to come before controlling inflation when the Bank of England’s monetary policy committee fixes base rate today, Birmingham business leaders say.
Birmingham Chamber of Commerce and Industry (BCI) expects, however, that controlling inflation will be a major concern for the MPC.
Policy adviser Katie Teasdale said yesterday: “We anticipate that the rising cost of food and energy prices will push inflation above four per cent by the end of this year.
“Despite slowing growth, this makes it extremely unlikely that we’ll see an interest rate cut this week.
“Indeed, if the MPC assesses the threat of medium and long-term inflation to have increased since June’s meeting, we may even see a rise - as unthinkable as this is for those feeling the pinch in the construction, housing and retail sectors.
“Clearly interest rates at their current level have not yet managed to control inflation and this needs to be a priority.”
The most recent BCCI survey showed that 52 per cent of manufacturers would be forced to raise prices with few anticipating that these rises will match cost increases and maintain margins.
“However, we would urge the BoE to bear in mind the importance of halting the economic slowdown and to hold interest rates this month.” Ms Teasdale said. “While inflation must be reined in, we need to find ways of encouraging economic activity and investment, as well as boosting business confidence.
“Business activity and long term investment projects are needed to stimulate local economies and there is a real cncern that rising interest rates will inhibit this crucial growth.”
The BCCI also urged the government to resist extra pay demands in the public sector.
“Business is concerned about the growing strike threat in the public sector, where a number of union leaders are seeking to re-negotiate recently agreed pay deals,” said Ms Teasdale.
“The Government must resist these demands for extra pay. Public finances are very weak and neither business nor its employees can afford additional taxes.”
Coventry and Warwickshire Chamber of Commerce chief executive Louise Bennett is among those who believe that base rate will be pegged at five per cent today.
“In many ways the MPC is caught between a rock and a hard place but basically I think the worries over the credit crunch and money supply will be more pressing,” she said.
“The crunch is hitting the headlines every day and certainly has manifested itself fairly early in the housing and construction sectors across the country and there is more bad news to come this week if reports are to be believed.
“The shadow monetary policy committee voted heavily in favour of a hold and it has been a very accurate barometer of what the real MPC does, so a hold in rates is the most likely outcome.”
National economics commentator Howard Archer of Global Insight agreed that the MPC is most likely to opt not to change rates today.
“However, this could well mask a three-way split in the vote and the future path of interest rates is currently highly uncertain,” he said.
“The Bank of England is currently facing by far the most challenging economic environment since it was granted operational independence in 1997.
“Indeed, it is facing the most challenging environment since the early 1990’s, if not earlier.
“Latest data and survey evidence are now pointing consistently to a deepening economic slowdown, and the risk of recession is now looking very real.
“At the same time though, inflation is well above-target and still rising, and there are serious risks that this could prove to be more than a temporary state of affairs.”