A further rise in interest rates could prove to be an increase too far, the British Chambers of Commerce said today, despite its latest survey showing buoyant conditions for businesses across the economy.
The general levels of activity in manufacturing and confidence among industrial companies are at their highest levels for at least a decade, while the services sector remains in robust shape even after five interest rate increases in less than a year, the BCC’s quarterly survey of businesses across the country reported this morning.
But while the leading business lobby group conceded that its survey findings were likely to add to strengthen the Bank’s case for still higher base rates, its economic adviser, David Kern urged the Monetary Policy Committee to move only cautiously.
“UK business has so far coped well with pressures after the latest interest rate rises, but we still warn of the risks from higher interest rates,” he said, although he admitted he does expect a further quarter-point rate rise to 6 per cent by October, and perhaps as soon as next month.
“Some of the arguments in favour of higher interest rates are not persuasive. The risk is that they will go too far. We are calling for greater caution in order to avoid unnecessary damage to productivity,”
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The BCC’s survey today highlighted the resilience of businesses in the face of higher rates but it sounded a warning that when a slowdown does take hold it “could be very sharp and painful”.
In the meantime, however, the survey found that both sales to the domestic market by manufacturers, and their domestic orders books stood at their strongest for 12 years, while confidence in the manufacturing sector over future turnover jumped to a 10-year high.
Industry’s export performance also looked strong, with both overseas sales and orders at the best levels since autumn last year.
The survey’s picture of services sector conditions was more mixed, but still upbeat, with sales in the domestic market by services businesses rising to their for three years, although orders dipped somewhat. Services companies’ fortunes in export markets also faded, with both sales and orders faltering.
The Bank of England is likely, however, to focus more on the survey’s findings for employment levels and investment plans, both of which pointed to strong economic conditions continuing. The BCC’s findings showed employment rising markedly in both services and manufacturing, with companies in both sectors planning to take on more staff in coming months.
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At the same time, manufacturers stepped up investment plans, with their intentions for future capital spending on plant and machinery reaching a record level for this survey. In services, investment intentions slipped back a little.
There was some reassurance for the MPC over its concerns that companies are attempting to push up prices, with the BCC finding that the overall number of companies expecting to raise prices dropping back for a second quarter in a row in the services sector, while pricing intentions in manufacturing were broadly stable.
But with corporate pricing plans still at elevated levels, City economists said that the data were unlikely to do much to appease the hawkish faction on the MPC.
“The general strength of the survey is likely to maintain the Bank of England’s concerns about potential capacity constraints, even though the number of manufacturing and service sector companies reporting that they were operating at full capacity eased back to a limited extent in the second quarter,” Howard Archer, of Global Insight, said.
”The BCC survey is unlikely to diminish expectations that the Bank of England will lift interest rates by a further 25 basis points to 6 per cent before the end of the year.”