Industry backlash as base rates rise

Michael Harrison

The City greeted yesterday's quarter point rise in interest rates enthusiastically but there was an angry reaction from industry, fearful that it will drive the pound higher and further damage export prospects.

At the end of its first meeting since being given operational independence to set rates, the Bank of England's monetary policy committee sanctioned an increase from 6.25 per cent to 6.5 per cent.

The rate rise had been expected following comments by the Bank's Governor, Eddie George, earlier this week about the inflationary impact of the building society windfalls. Most City economists are pencilling in at least one more quarter point rate rise this year.

The monetary committee said the increase was needed to achieve continued growth in outout and employment at a sustainable rate. It added that the latest monetary and economic data was consistent with the Bank's last inflation report three weeks ago. This said that notwithstanding the strength of sterling, which was helping restrain inflation, there was likely to be a need for a "further moderate tightening of policy".

The Bank declined to comment on how the committee had voted and whether it had backed the rate rise unanimously. This will emerge when the minutes of the two-day meting are published in six weeks' time.

Foreign exchange, equity and bond markets took the rate rise in their stride. The pound firmed initially against the deutschmark but then lost ground to close 1.5 pfennings lower in London while gilts rose marginally and the FTSE 100 Index put on 68.8 points to close at 4,645.

Neil Mackinnon of Citibank said: "I certainly think it's the right move by the Bank and my guess is that there are probably a few more interest rate increases in the pipeline. It is clear that the Bank has decioded not to wait for the Chancellor's Budget. They have decided to establish credibility early on."

But the reaction from business was less favourable. The Confederation of British Industry's chief economic adviser, Kate Barker, said it was disappointed at the timing of the increase because short-term inflationary pressures were subdued at present. "We would have preferred interest rates to be left on hold until after the Budget when any change in the fiscal stance could be taken into account," she added.

"We remain concerned about the impact of higher interest rates on sterling at a time when many exporters into Europe are experiencing a sharp squeeze on their profit margins."

The Engineering Employers' Federation also attacked the increase warning that it would damage the UK's manufacturing base which was still suffering fragile demand, particularly oversaes because of the strength of the pound.

The Institute of Directors backed the move, however, its head of policy Ruth Lea describing the quarter-point hike as "a step in the right direction to pre-empt inflation and maintain stability".