Events over the last few weeks support our view that the MPC should have waited before contemplating further increases in UK interest rates. The recent clamour for early interest rate increases has been based on exaggerated perceptions of growing business pricing power. We regret deeply that the MPC has accepted the misguided calls for immediate monetary tightening. Coming so soon after the damaging Budget increase in the Small Companies’ Rate from 19% to 22%, an increase in interest rates at this time would now pose new and unpredictable threats for British business. The cumulative impact of three Bank Rate increases announced since August 2006 has not yet been fully felt.
"We acknowledge that inflation is still a potential UK danger, and the MPC may have to take further action. CPI annual inflation rose to 2.8% in February, and there are still uncertainties relating to the current wage round. But there are powerful arguments suggesting that demand pressures will slow and inflation will decelerate. With average earnings growth below RPI inflation, UK disposable incomes are being squeezed and spending will inevitably decelerate. Moreover, the recent rise in sterling is exerting a dampening effect on economic activity and on inflation. David Kern concluded: “Given the underlying uncertainties, there were powerful arguments for the MPC to wait, so as to avoid damaging the economy unnecessarily. At a time of heightened geo-political tensions in he Gulf, and new risks of US slowdown triggered by the downturn in the housing market, today's hike in Bank Rate could have very harmful effects on business confidence and on the economy's growth prospects. To avoid damaging monetary overkill, today's increase in Bank Rate should be quickly reversed if the economic situation worsens."