The British Chambers of Commerce (BCC) Q4 2006 Economic Survey (QES) of 4,500 UK businesses may be taken as a reason to further raise interest rates…but hold off and return monetary policy to its boring ways is the message coming from the BCC.

The Q4 results are positive overall with net domestic balances surging across the board to historically high levels.  Both the manufacturing sector and the service sector recorded stronger balances for home sales and orders.  However, the manufacturing balances for export sales & orders recorded sharp and disturbing falls with the growth in the service sector being only moderate.

Worryingly, there were marked declines in Q4 for the service sector’s balances for employment, employment expectations and investment.  Pressures to raise prices are much stronger in both sectors and wage pressures are up slightly.

Although the QES showed the recent shock interest rate rise to have been needed, there is not enough evidence for a further rate rise to be justified.  With the poor export figures and the service sector’s employment and investment balances showing decline it is clear that the recovery in the economy is still fragile and a further interest rate rise could bring that to an abrupt end.

David Kern, economic adviser to the British Chambers of Commerce, said:

"The very high expectations of price increases in both manufacturing and service, may heighten the clamour for higher interest rates. But the available evidence does not support at present further tightening. Even if one accepts that last week's shock increase in Bank Rate was necessary, it is vitally important to avoid monetary overkill. 

"Many of our members that expect to raise prices may simply not be able to do so in a harsh competitive environment. Even if firms succeed in regaining some pricing power, this should not in itself indicate a general upturn in inflation. The critical test remains the trend in labour costs. Unless there is firm evidence that private sector wage pressures are accelerating, there is no justification for pushing rates even higher.

"We also wish to urge the MPC to make monetary policy boring again, as the Governor indicated in the past he would like to do. Shock tactics are unwelcome and potentially harmful. British business requires a stable and predictable interest rate environment.”