LARGE INTEREST RATE INCREASES SET TO TRIGGER SHARP SLOWDOWN IN THE PACE OF UK ECONOMIC GROWTH
11/02/07 | 10:10
Launching the results of the February 2007 BCC Quarterly Economic Forecast, David Kern, Economic Adviser to the BCC, said: "In reaction to large interest rate increases, the new BCC Quarterly Economic Forecast is signalling a period of below trend quarterly GDP growth, from Q2 2007until Q1 2008, following the recent period of strong growth. UK interest rates have risen significantly and will probably increase further in the next few months.An aditional increase in Bank rate to 5.50% in the next few months is a distinct possibility.
"We believe that the cumulative effects of three interest increases implemented since August 2006, and the marked appreciation in the value of sterling, will prove to be very significant. The squeeze on disposable incomes (RPI inflation is now higher than average earnings growth), and the deceleration in global activity, will aggravate the slowdownin UK growth. Year-on-year quarterly GDP growth is forecast to decelerate from an above-trend 3.0% in Q4 2006 to 2.2% in Q1 2008. But there is a distinct risk that the slowdown would be worse.
"A marked deceleration in activity is highly likely even if Bank rate stays at 5.25%. But if Base rate goes up to 5.5%, growth would fall below 2%
"The arguments higher interest rates are finely balanced. The MPC voted by the narrowest of margins (5 against 4 only) for the shock January increase in rates. There is no hard evidence so far that UK wage settlements are accelerating. Moreover, the Bank of England expects significant falls in inflation later this year.The MPC can afford to wait until trends in labour market become clearer.
"In spite of the relatively strong growth in 2006 & 2007, UK economic performance is set to remain mediocre overall. The BCC is raising significantly its forecast for average 2007 UK GDP growth, to 2.6%, after strong above-trend growth of 2.7% recorded in 2006. The BCC is predicting a marked slowdown in annual average GDP growth, from 2.6% in 2007 to 2.3% in 2008, below the BCC’s 2.5% November forecast for 2008. If, as seems likely, Bank rate goes up to 5.50% in the next few months, GDP growth is likely to be weaker: 2.5% in 2007, 2.1% in 2008, & a year-on year trough of 1.9% in Q1 2008.
David Kern concluded: "We acknowledge that inflation is a serious problem, and we accept that the MPC may have to take further action. We expect CPI inflation to average 2.5% in 2007 &. 2.1% in 2008, after 2.3% in 2006. But monetary policy cannot affect the economy instantaneously. The MPC must allow time for the measures taken already to work, before raising rates further. British business is committed to low inflation. But it is vital that we have a period of stability in interest rates. We must avoid at all cost damaging monetary overkill.
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.