Business Groups Divided over Interest Rate Cut

Small–business groups are divided about whether the Bank of England should cut interest rates – while some argue that a cut is needed to boost growth, others claim it is not possible because of rising inflation.

The dispute follows the publication of a new survey by the Confederation of British Industry (CBI), which predicts that the rate of inflation is likely to exceed three per cent for the rest of 2008, peaking at 3.8 per cent in the third quarter. The CBI also forecasted that the UK economy would grow at the slowest rate for 17 years in 2009.

“The high level of inflation in the short-term prevents the Bank of England from reducing rates for much of this year,” said CBI director general Richard Lambert. “But once the peak in inflation has passed, we believe the Bank will have the flexibility to cut interest rates twice by the second quarter next year.”

British Chambers of Commerce economic adviser David Kern agreed a cut was not possible at present.

“We remain convinced that higher interest rates are totally misguided and should be rejected at this stage,” he said. “We urge the Bank of England to persevere with a cautious approach and keep rates unchanged next time around.”

However, the Forum of Private Business (FPB) said a rate cut is urgently needed to help small firms survive current tough trading conditions.

“For small business, interest rate cuts are the key to boosting growth,” said FPB spokesman Philip Moody. “We can’t see the economic situation getting better this year. The majority of businesses have been feeling the pinch since February.”

The CBI also emphasised that its survey was not predicting a recession.

“Back in the early 1990s, we had a prolonged period of plummeting consumer demand and there were large job cuts across the board,” said Lambert. “These days, firms are leaner and more efficient and our economy’s reach is far more global. We should avoid believing a recession is inevitable, or talking ourselves into unnecessary trouble.”

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