Businesses Small and Large Appeal to the Bank of England to Delay Rate Rises

Businesses Small and Large Appeal to the Bank of England to Delay Rate Rises

Interest rates in the UK look set to rise over the next few months to combat rising inflation. Pressure is mounting on the Bank of England to raise rates with inflation in the UK now exceeding 4 per cent. Speculation is mounting that the Monetary Policy Committee may double rates to 1 per cent in the near future.Inflation currently stands at nearly double the government target and the only fiscal tool at the bank's disposal is the base rate of interest. the base rate has been set at an all time low of .5 per cent since March 2009, leading to relatively low rates for commercial and residential borrowers. Conventional economic wisdom suggests that rising rates will dampen spending, thus cure inflation. However, our current malaise is caused by rising commodity prices worldwide, and added to that, consumer spending is still essential to keep the British economy from a double dip recession.The British Chamber of Commerce have warned the bank against taking the step of raising rates. The Chamber have strongly suggested to the bank that it delay a rise in rates until the economy is showing more promising signs of recovery. The evidence that the economy had achieved zero growth in the last quarter, announced in January seems to back up the chamber's argument quite convincingly.Despite concerns around inflation, it is important for the UK to maintain an expansionary monetary policy with very low official interest rates until later in the year. That is the view of the BCC's chief economist, David Kern. Rather than increasing interest rates to combat inflation, Mr Kern believes that economic policy should be focused on reducing the risk of a 'double dip' recession.Recent research would tend to suggest that the extent of the fragility of the British economy has been under estimated by most people. A perfect storm of falling levels of income, faltering consumer confidence and low consumer spending as a result have led the BCC to predict a far less optimistic growth forecast for the coming year. Instead of a nearly two per cent growth rate, the BCC have predicted 1.4 per cent instead, a significant decrease. This is without the impact of rising interest rates.Higher loan repayments will mean that many households won't have as much cash to pump into the economy on other things, which will lead to business failures and the end result would be a repeat of what we saw in 2008 when the markets crashed and the UK went into recession. The general consensus is that keeping interest rates low for a while longer will allow more money to circulate and expand our economy.Many financial and economy experts have voiced opinions that the Bank of England do not need to increase interest rates to force inflation down, as prices will naturally fall because wages are not increasing with the prices. This means that prices will be forced down to make services and products affordable.Mr Baxter worries that the Bank of England will end up being backed into a corner where it feels it has no choice but to increase interest rates. He said: "The problem that we've got at the moment is that the public expect the interest rate to rise; the markets are expecting interest rates to rise."Another problem that rising interest rates bring is that businesses will face higher commercial mortgage and loan payments. A 0.5 per cent rise in interest rates on a 500,000 commercial mortgage costs a company an extra 2,500 per year; money that many businesses simply don't have in a challenging economic climate. Rising commercial mortgage costs to businesses could be the final nail in their coffin.The future for many companies rests with the MPC, there are many businesses operating at the very limit of insolvency at the moment and increasing the cost of borrowing might well push them over. A drop in consumer spending could also prove catastrophic for both retail and industry

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