Commenting ahead of today’s (Thursday) Monetary Policy Committee (MPC) decision, David Kern, Chief Economist at the British Chambers of Commerce, said:
“We expect the MPC to keep interest rates on hold at its August meeting. While recent pessimism about the economy is unjustified, it is clear that growth needs to be boosted. Preliminary figures show that GDP growth slowed to 0.2% in Q2 2011, and there are worrying signs that UK manufacturers are facing difficulties. The international situation remains worrying, in spite of recent debt agreements in the Eurozone and the US.
"The government’s current austerity plan is vital to stabilise our public finances, but it will inevitably increase the squeeze on businesses and consumers. Given this, everything must be done to sustain the recovery. Our forecast for growth in 2011 remains at 1.3%. Inflation will increase further in the short term, due to earlier increases in VAT and in energy costs, and to future hikes in utility prices. However, these are factors beyond the MPC’s control, and we expect CPI inflation to rise above 4.5% in the next few months, before falling next year. Higher inflation will worsen the squeeze on cashflows and on disposable incomes.“As long as wage pressures remain weak, and there are no signs that the UK is at risk of a wage-price spiral, we believe that the MPC should keep interest rates at its current 0.5% level until at least the early months of 2012. If there are signs that the economy weakens further, the MPC should not hesitate to increase the QE programme.”