"We are not surprised by today’s MPC's decision to raise the interest rate to 5.75%. However we are very concerned over the long-term effects on British business of the increasingly aggressive policy stance that appears to be emerging. Following last month’s very narrow MPC vote, and the Governor’s support for immediate tightening, the markets have widely predicted today’s move. But we question whether the risks and uncertainties justify aggressive and persistent interest rate increases at the present time.
“It is generally accepted that annual CPI inflation is set to fall towards 2% before the end of 2007. There are some concerns that inflation may start rising again in 2008, because of recent money supply increases. But the relationships involved are too vague and uncertain to justify relentless interest rate increases. If the explicit policy aim is to produce a very sharp slowdown in activity, the eventual impact on business could be damaging.
David Kern concluded: "As long as wage pressures remain under control, the MPC should adopt a cautious stance. It should allow more time for previous interest rate increases to have their effect, before rushing to raise interest rates further, thus inflicting lasting damage on the economy. The strong pound is intensifying the downward pressures on activity. British business has shown resilience so far in the face of higher interest rates, but the pain is set to increase rapidly from now onwards.”