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BOE Should Avoid Raising Interest Rates `Too Early,' BCC Says

Bank of England policy makers should avoid increasing interest rates too quickly as they try to balance the dilemma of above-target inflation and slowing economic growth, the British Chambers of Commerce said.

“If they act too early, they will increase the risk of derailing the recovery and increase the risk that the government will find it hard to implement the austerity program,” BCC Chief Economist David Kern said in an interview in London. “June is the earliest they should consider doing it, and preferably, wait until August.”

Prime Minister David Cameron said on Jan. 9 that recent levels of inflation have been “concerning,” while Citigroup Inc., Societe Generale SA and BNP Paribas SA said last week the Bank of England may raise the benchmark rate faster than previously anticipated to tame price pressures. Bank of England officials will probably leave the rate and their bond-purchase plan on hold on Jan. 13 at their first policy meeting of 2011, according to surveys of economists by Bloomberg News.

“Hit inflation on the head, but try to do it without destroying the economy,” Kern said. “The main emphasis must be now to make sure that the growing clamour for raising rates should not be acted on immediately, even though I accept rates will have to go up later this year.”

Photographer: Chris Ratcliffe/Bloomberg

All 61 economists in the survey predict the Bank of England will keep its key interest rate at a record low of 0.5 percent on Jan. 13. Close

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Photographer: Chris Ratcliffe/Bloomberg

All 61 economists in the survey predict the Bank of England will keep its key interest rate at a record low of 0.5 percent on Jan. 13.

All 61 economists in the survey predict the Bank of England will keep its key interest rate at a record low of 0.5 percent on Jan. 13. Officials will also leave the size of the bank’s emergency bond-purchase program at 200 billion pounds ($310 billion), according to all 39 economists in a separate survey.

‘Reserve’ Option

The BCC last month forecast that the Bank of England would increase its bond holdings this year as government spending cuts to reduce the deficit begin to affect the economy. Kern said yesterday that while there was still an argument for increasing stimulus should “the economy shows signs of acute weakness,” that option was now likely to be kept in “reserve.”

He has also revised his interest-rate forecast and sees the benchmark rising to 1.25 percent by the end of this year from a previous prediction of 1 percent.

An index of manufacturers’ export sales rose to a 16-year high in the fourth quarter, while an export gauge at services companies increased to the highest in three years, the BCC said in a report published today. In the domestic market, the index for services remains “weak,” it said.

‘Lukewarm’

The group sees gross-domestic-product growth slowing to between 0.2 percent and 0.3 percent in the current quarter and the second quarter of 2011 from an estimated 0.4 percent in the three months through December.

“The economy continues to grow, but at a low pace,” currently characterised by a “very strong” manufacturing industry and a “weak, lukewarm, disappointing” services sector, Kern said.

While recent data indicate the U.K. recovery is faltering as the government prepares its budget squeeze, inflation accelerated to 3.3 percent in November, the ninth month it exceeded the government’s limit. Kern said it’s “almost unavoidable” that inflation will go toward 4 percent.

“If the Bank of England feels that its credibility is on the line, they may act too early,” he said. “I don’t think their credibility is on the line, but if they’re afraid it is, that could be a problem.”

Britons increased spending on Visa payment cards by 2.6 percent in the fourth quarter from a year earlier, compared with growth of 6.9 percent in the third quarter, Visa Europe said in a separate report published today, citing data compiled by Markit Economics Ltd. in London. The drop in the pace of growth partly reflected “slow” pre-Christmas shopping and cold weather, it said.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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