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BCC warns ‘hasty’ rate rise could derail recovery

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08/07/2014
The British Chambers of Commerce (BCC) has warned the government against "prematurely" raising interest rates as its latest quarterly economic survey suggested challenges remain for the UK's recovery.

Director general of the BCC John Longworth said the UK “cannot afford populist decision-making” that could undermine its long-term success.

Its quarterly economic survey covering Q2, which collates the views of some 7,000 UK businesses and is monitored by the Bank of England and Treasury, showed most of its key balances had fallen back from an “unexpected” surge seen in Q1.

For example, every BCC export and investment balance fell in Q2, for both manufacturing and services.

In its most recent economic forecast, the BCC predicted quarterly GDP growth for Q2 would be 0.8%, with full-year growth of 3.1%, but chief economist David Kern said its Q2 survey results increased the risk of a downgrade.

However, both Kern and Longworth said the findings suggest the UK’s economic recovery remains on track, and should not be derailed by an untimley rate rise.

“[The survey results] reinforce the case against the Bank of England making any hasty decisions on raising interest rates in the very short term,” said Longworth.

“By driving up the cost of credit for fast-growing firms, many of whom do not sit on the same healthy cash piles as their more established counterparts, early rate rises may mean more limited growth ambitions among the very firms we are counting on to drive the recovery.

“We must nurture the business confidence we are seeing at present by giving firms the security of working in a low interest rate environment for the foreseeable future – with eventual rises both moderate and predictable.”

Kern added: “The Q2 falls in all the export and investment balances act as a timely warning that although growth is stable, challenges facing our economic recovery still remain. Rises in sterling are making UK exports more expensive.

“Uncertainties around early interest rate increases are adding to the difficulties, and our excessively large current account deficit poses potential risks. UK growth cannot permanently rely on rising consumer spending, which is driven by a buoyant housing market, and on excessive household debt. Unless investment and net exports make bigger contributions to growth, the recovery could stall.”

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