British Chambers of Commerce warn against hasty interest rate rises

The Bank of England has been advised by the British Chambers of Commerce to approach interest rate increases with caution.

In its Quarterly Economic Survey for Q2 2014, the British Chambers of Commerce (BCC) advised the Bank to refrain from “hasty decisions”, arguing that it could limit economic development.

John Longworth, director of the BCC, said that a premature hike in interest rates would potentially hamper the growth of firms that the nation is “counting on to drive the recovery”.

Canvassing the opinions of 7,000 UK businesses, researchers found that growth in certain industries has slowed between April and June. However, the economy is in robust health, showing positive signs and clearly “moving in the right direction”.

In manufacturing during the second quarter, three balances were at an all-time high – domestic sales (+42%), profitability confidence (+51%) and capacity utilisation (+46%).

“While we never like to report even modest declines in our investment and export balances, these are unsurprising, as the economy jolted forward last quarter and has now settled into a period of more stable growth,” commented Mr Longworth.

“But we must still aim higher – great, long-term sustainable growth must be our ambition, and we should not settle for second best. Repairing our broken business finance system, which constrains access to credit for businesses with the potential to grow, must be a top priority.”

He concluded by saying that this will foster a confident environment, encouraging companies to take on additional staff, invest more in the business, and, in turn, grow, helping boost the UK’s economy.

David Kern, chief economist at the BCC, added that although most of the key balances for Q2 are lower in comparison to the first quarter, they nevertheless remain higher by historical standards.

Still, he continued, Q2 falls in all the export and investment balances serve as a “timely warning” that even though growth is stable, the UK still faces challenges.

“Uncertainties around early interest rate increases are adding to the difficulties, and our excessively large current account deficit poses potential risks,” Mr Kern said.

“UK growth cannot permanently rely on rising consumer spending, which is driven by a buoyant housing market, and on excessive household debt. Unless investment and net exports make bigger contributions to growth, the recovery could stall.”