Businesses Small and Large Appeal to the Bank of England to Delay Rate Rises

With inflation on the rise and now at approximately 4%, it is inevitable that an increase in interest rates is just around the corner. All eyes are now on the Bank of England's Monetary Policy Committee to see when they are going to address this issue, since they have recently confirmed that interest rates will stay put for the time being. But they have stated that the rates will rise by the last quarter of 2011.

The government's target for inflation is only 2%, and so it's clear that something needs to be done to deal with the problem of inflation being twice as high. The Bank of England set the rate at 0.5% two years ago due to the recession, and it still sits at that today. The aim was to allow the economy to recover, and it now looks as though it's fighting back. But they have been reluctant to increase the rate again as they feel that this would have an adverse effect on the recovery of our country's economy.

Recent comments from the British Chamber of Commerce (BCC) have suggested that such an interest rate rise could be devastating to the UK economy. The BCC has urged the Bank of England to delay any interest rate rises until there is more evidence that the economy is showing form signs of improvement.

Despite concerns around inflation, it is important for the UK to maintain an expansionary monetary policy with very low official interest rates until later in the year. That is the view of the BCC's chief economist, David Kern. Rather than increasing interest rates to combat inflation, Mr Kern believes that economic policy should be focused on reducing the risk of a 'double dip' recession.

Indeed, the BCC's most recent research found that the UK economy is more fragile than many people believe. With falling income levels and low consumer confidence, the BCC have cut their own growth forecast for 2011 from 1.9 per cent to just 1.4 per cent. Interest rate increases could cut this growth further, ministers have been warned.

The result of rising rates would be an increase in the cost of borrowing throughout the entire economy. Mortgages, both residential and commercial would become more expensive, a factor which would dampen spending on the high street. This would see an increase in unemployment, but owing to the fact that commodity prices are at the root cause of the problem, there would be little impact on the underlying rate of inflation. The UK economy might even face 1970s style stagflation instead.

Another expert, Michael Baxter, believes agrees that the MPC should delay increasing interest rates for the time being. The editor of Investment and Business News believes that prices will start to fall naturally as there is no inflationary pressure coming from huge wage increases.

The concern voiced by Mr Baxter and others is that the bank will come to feel that it has run out of options and will have no other alternative than to raise rates. He said: "The problem that we've got at the moment is that the public expect the interest rate to rise; the markets are expecting interest rates to rise."

Businesses will see cash sucked out of their enterprises to pay for more expensive commercial mortgage and loan repayments. A company with properties of £1 million will have to sacrifice £5,000 for every .5 increase in the base rate. Looking at the sums in this light and it's easy to see how jobs will quickly have to be shed. Companies do not have the cash reserves to accommodate such losses and it will inevitably result in redundancies.

Therefore with May being the countdown to interest rates, business the length and breadth of the company will be holding their breath every second week of every month to see what the Bank of England will decide when it comes to the Base Rate. A deadly cocktail of rising commercial and residential mortgage payments will mean less being spent by consumers and therefore impacting businesses. Interest rates at the wrong time could be a hammer blow to the fragile economy.


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Timothy Frodsham writes for Just Commercial Mortgages.com the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.