The first-quarter rebound in the U.K.’s economy was weaker than expected, adding to the argument that the Bank of England should delay raising its key interest rate, the British Chambers of Commerce said.
Gross domestic product probably grew between 0.6 percent and 0.7 percent from the fourth quarter, when the economy contracted 0.5 percent, BCC Chief Economist David Kern said in an interview in London yesterday. “I was expecting a bigger rebound,” he said.
The Bank of England’s nine-member Monetary Policy Committee is holding off raising interest rates to support a faltering recovery, even after inflation accelerated to the fastest pace in more than two years. The BCC’s first-quarter survey of U.K. companies published today showed “disappointing” results as all key manufacturing gauges fell and service-industry measures posted only a “slight” improvement.
Today’s data “don’t point to a new recession, they point to continued growth, but the recovery is fragile and they certainly provide support for the view that the MPC should not rush” tightening policy, Kern said. “The longer they wait, the better the growth profile.”
While the probability of policy makers raising interest rates this month or next has increased, Kern said, they should consider holding off until at least the third quarter. Bank of England officials will probably leave their benchmark rate and their emergency bond-purchase plan on hold later this week, according to surveys of economists by Bloomberg News.
Measures of orders, sales, exports, employment and confidence among manufacturers declined in the first quarter, according to a survey conducted by BCC. An index of factory domestic sales fell 15 points to 8, the lowest reading in a year, while export sales dropped 7 points to 30, today’s report showed.
Indexes of confidence of revenue and profitability among manufacturers dropped to their lowest since the second quarter of 2009, the height of the recession, the BCC said. Among service providers, the gauge of domestic sales gained 1 point to 6 and export sales slipped 6 points to 15.
Some of the results of the first-quarter survey, which covered almost 6,000 companies between Feb. 21 and March 14 and asked firms about conditions in the preceding three months, may have been depressed as cold weather disrupted activity in December, Kern said. However, “in spite of the weather, the results are disappointing,” he said.
The report found that inflation was the “biggest area of anxiety” among manufacturers and service companies in the first quarter as the proportion of respondents saying price gains were more of a concern than three months ago rose “sharply.”
All 57 economists in a Bloomberg News survey predict the Bank of England will keep its benchmark interest rate at a record low of 0.5 percent on April 7. Officials will also leave the size of the bank’s emergency bond-purchase program at 200 billion pounds ($323 billion), according to all 32 economists in a separate survey.
Kern forecasts that the Bank of England’s main interest rate will rise to 1.25 percent by the end of this year in three 25 basis-point moves. He maintained an estimate of 1.4 percent growth in Britain’s gross domestic product in 2011.
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