Businesses say rate hike must not choke growth

Business leaders in the UK are pinning their hopes on incentives to boost growth in the Government's Autumn Statement later this month, after the Bank of England raised interest rates to three per cent on Thursday.

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The 0.75 per cent increase represented the largest single jump in the base rate since 1989, while the rate itself is now the highest since the financial crisis 14 years ago.
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'Short-term pain for long-term growth prospects'

Andrew Bailey, the Bank of England Governor, said the rise was necessary to counter global inflation as he warned there could be a prolonged, if shallow, recession in the UK."This is a difficult time," Mr Bailey said. "There is no easy outcome. If we do not act forcefully now, it would be worse later on."Chancellor of the Exchequer Jeremy Hunt said the bank's decision to raise interest rates mirrored action being taken across the world as nations faced up to "the enemy" of high inflation, driven by the war in Ukraine and the Covid-19 pandemic.“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible," he said.“Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth. However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”  

Business bodies demands safeguards for growth and stability

But David Bharier, Head of Research at the British Chambers of Commerce (BCC), said that while the hike in the base rate was no surprise, he described it was "a very blunt instrument to control inflation that is largely the result of global factors".He added: “This is further bad news for businesses who find themselves trapped between rising costs of raw materials, energy and borrowing, and weakening consumer demand.“With the Chancellor and Prime Minister both signalling that the Autumn Statement is likely to result in spending cuts and tax rises, businesses will be extremely worried about what the future holds.“It is crucial that the Government sets out a long-term plan that stabilises the economy and focuses on growth.”Alpesh Paleja, Lead Economist at the Confederation of British Industry (CBI), urged that measures in the Autumn Statement should safeguard capital spending and investment opportunities for businesses.He said the "bumper" rate rise underscored the scale of the inflation challenge.But he added: “With monetary policy focused on tackling inflation, the government’s immediate priority should be to reinforce markets’ faith in the UK’s hard-won reputation for stability – but fiscal sustainability and growth shouldn’t be an 'either or' choice.“The Autumn Statement must learn the lessons of the 2010s: fiscal sustainability and lifting trend growth are both priorities. Alongside protecting the most vulnerable, the government should safeguard capital spending and investment allowances to enable private sector investment to drive future growth.”

Inflation to peak in early 2023?

Kitty Ussher, Chief Economist of the Institute of Directors, said her organisation's research indicated that business leaders thought inflation would peak next spring."Today’s rise, which is in line with expectations, is therefore the least-worst option, to anchor inflation expectations firmly at a lower level in the interests of overall macro-economic stability."In the long term, stable prices are an essential backdrop for a healthy business operating environment.“Of course, raising the cost of borrowing also deters business investment, choking off growth. As we get into the New Year, the Bank of England needs to be careful not to overshoot in its response, risking a longer fall in demand than is necessary."

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