Interest rates hold – business industry reaction

The Bank of England has revealed that it has held interest rates at 5.25%. or the sixth time in a row by the Bank of England’s Monetary Policy Committee (MPC).

Experts believe that the Bank may look to cut rates as early as June, although a reduction in August or September is said to be more likely. The Bank has also published its latest economic forecast, with inflation expected to fall to the Bank’s 2% target in the coming months and dip to 1.9% in 2026. The Bank also expects the economy to have grown by 0.4% in Q1 and predicts a 0.2% increase for Q2.

The MPC voted 7-2 to hold rates steady, with the dissenters preferring a cut of 0.25% to 5.0%.

Responding to the decision by the Monetary Policy Committee Dr. Roger Barker, Director of Policy at the Institute of Directors, said “It is disappointing that the Bank of England has once again decided not to reduce interest rates. Our own research shows that two thirds of business leaders believe that the right decision would have been to start cutting the bank rate today.

“The UK economy remains fragile. Last week, the OECD forecast that the UK would have the weakest economic growth in the G7 in 2024 and, whilst improving, our own Directors’ Economic Confidence Index shows that IoD members on balance remain pessimistic about UK economic prospects. Furthermore, inflation is forecast to come down sharply in the coming months – below the Government’s 2% target level.

“In our view, these conditions would have justified an early interest rate cut. There is a significant risk in doing nothing. Interest rate cuts will only impact the real economy with a significant time lag and, once definitive evidence of lower inflation has been gathered, it will already be too late. The Bank needs to get ahead of the curve and not repeat the mistake of 2021, where it was slow to adjust monetary policy to the prospect of rising inflation.

“A cut in the base rate is the single most important step that could be taken at the current time to boost business confidence and create the conditions for meaningful economic growth in 2024 and 2025.”

Anna Leach, Deputy Chief Economist, CBI, said “Today’s vote 7-2 to hold rates is in line with the CBI’s expectation that the MPC want to see more evidence that past falls in domestic inflationary pressure are sustainable before they’ll move to cut rates. Services inflation and wages data both suggest a cautious approach is warranted. Inflation in the services sector is triple the inflation target and average earnings growth is still running at around double the rate consistent with the inflation target.

“With the economy appearing to be moving out of recession – albeit anaemically – there is a delicate balance to be struck between managing inflationary pressures and not snuffing out a nascent recovery. It is noteworthy that the Bank judge that demand growth is going to run behind supply growth over the next couple of years. Overall, today’s release does not change our view that the first rate cut is most likely to be in August.”

David Bharier, Head of Research at the British Chambers of Commerce, said “Today’s decision to hold the interest rate at 5.25% was widely expected. Businesses will be hopeful that tentative signals from the Bank translate into a rate cut later this year.

“However, for many SMEs borrowing costs remain very high – and today’s hold means another month of hesitation on investment and growth.

“Our research shows that business concern about interest rates is easing, in part due to the period of stability since last August. Our latest survey showed 35% of firms worried about the cost of borrowing, down from 39% at the end of last year. But these remain high levels of concern, compared to pre-pandemic.

“Tomorrow’s GDP figures could bring some welcome news, but economic conditions remain tough. Alongside high interest rates, firms are grappling with rising costs, skills shortages and further trade friction with the EU.

“Business confidence has been gently ticking up as they see a way out of the inflation and interest rate double whammy, but policymakers need to support this with a clear plan for growth and stability.”