Q4 GDP Figures Will Reinforce Pressure for Higher Interest Rates...But MPC Minutes & Governor's Speech  Provide Welcome Hope That The Bank Will Not Over-React.

Commenting on the ONS preliminary GDP estimate for Q4 2006, the Governor of the Bank of England's speech yesterday to the Birmingham Chamber of Commerce, and Minutes of the MPC meeting held on 10 & 11 January 2007, David Kern, Economic Adviser to the BCC, said:

"Today's strong Q4 GDP growth figures will inevitably reinforce pressure for early interest rate increases. Quarterly GDP growth accelerated to 0.8% in Q4, as signalled by our recent QES. This was the fifth above-trend quarterly growth. Annual Q4 GDP growth rose to 3.0%, and the service sector remained the economy's main driver.

"But the news that the MPC voted only by the narrowest of margins (5 against 4) for the shock increase in rates earlier in January confirms that the decision was less conclusive more evenly-balanced than was initially thought. The Governor left in his speech many question unanswered as to why it was felt necessary to shock the markets. But Mr King's welcome confirmation that the Bank expects significant falls in inflation later this year gives hope that the MPC would do its best to avoid monetary overkill.

David Kern concluded: "We also welcome the Governor's promise that "I have not abandoned my ambition to be boring". But it is important that his words are backed by deeds. British business is committed to stability and low inflation. We understand that risks have increased, and further action may be needed. But to avoid causing unnecessary long-term damage to the economy, it is important not to over-react until trends in wage settlements become clearer"