Business groups warn interest rate hike poses threat to UK economy

Economist said central bank 'jumped the gun' with decision to raise base rate

Business groups have slammed the Bank of England’s decision to raise interest rates above 0.5 per cent for the first time since the financial crisis, and warned that a hike poses a threat to the economy.

The Bank’s monetary policy committee voted unanimously to increase the rate to 0.75 per cent, following mounting speculation across global markets that a hike was on the cards.

The British Chambers of Commerce branded the decision “ill-judged”, while the Institute of Directors said the Bank had “jumped the gun”.

Suren Thiru, head of economics at the BCC, said the decision did not seem wise “against a backdrop of a sluggish economy”.

“While a quarter point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty,” he added.

“The increase reinforces a concerning aspect of the Bank of England’s recent approach to monetary policy, which appears to be overly focused on reinforcing an idealised direction for rates, rather than on economic reality - an approach that unnecessarily risks UK’s growth prospects.

“The central bank’s assumption that the economy’s speed limit has slowed is unduly pessimistic, as sustained action to fix the fundamentals at home, from closing the skills gap to greater infrastructure investment, would materially help lift the UK’s growth potential.”

Mr Thiru said the MPC needs to carefully consider its next move, and said the most preferential option would be for “a sustained period of monetary stability amid the current economic and political uncertainty”.

Meanwhile, the IoD’s senior economist, Tej Parikh, said: “The rise threatens to dampen consumer and business confidence at an already fragile time.

“Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year’s first quarter. At present it’s unclear just how sustained any rises in pay will be, and even if we are to see strong wage growth, the impact on inflation could be limited by the need for consumers to meet borrowing costs.”

He said that while Brexit remains a crucial factor, affecting directors’ investment decisions and keeping sterling volatile, the MPC should have held off until its November meeting, “allowing it to account for October’s all-important Brexit deadlines, and get a firmer grasp on the broader trend in wage increases. But in reality, the Bank had tied its hands with recent communications, and the rate hike will come as little surprise”.