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Bank urged not to use interest rates to combat inflation

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The Bank of England should resist the temptation to raise interest rates until the end of the year despite stubborn inflationary pressures.

That is the view of the Federation of Small Businesses (FSB).

The latest quarterly inflation report from the Bank of England has suggested that the headline rate of inflation will not begin to fall back towards its target rate of 2 per cent until 2013.

In its report the Bank said: “There is a good chance inflation will reach 5 per cent later this year, and it is more likely than not to remain above the 2 per cent target throughout 2012, boosted by the increase in the standard rate of VAT, higher energy and import prices, and some restoration of companies’ profit margins.

“The projection is markedly higher over the first half of the forecast period than in February. That largely reflects further rises in energy prices and, associated with them, a higher likelihood of substantial increases in domestic utility prices over the next year.”

Pointing the finger at a poorer boost from exports and a slower than expected recovery in consumer spending, the Bank downgraded its predictions of the UK’s annual growth rate for 2013 from 3.1 per cent to 2.9 per cent.

The FSB called on the Bank to keep the base interest rate at 0.5 per cent until at least the third quarter of this year.

Against a background of a slowdown in manufacturing output, rising prices and subdued wage increases, the business group argued that the current economic position will apply extra pressures to smaller firms.

Adding its voice to the debate between the need to control inflation and the requirement to limit interest rate increases as a way of easing the cost of business credit, the FSB said the Bank should reassess the base rate no earlier than quarter three and keep the rate at 0.5 per cent until at least that point. Rather than impose quick and large increases, the Bank should graduate any rises in the cost of borrowing.

Additionally, the FSB wants the Government to avoid imposing any additional increases in consumer taxes that could lead to higher inflation, and to introduce a ‘true’ fuel duty stabiliser that would properly control pump prices and give greater cash-flow certainty to small businesses.

John Walker, the FSB’s national chairman, commented: “We understand that rates need to rise to tackle inflation, but with businesses cash-flow and order books low and the consumer already facing a higher cost of living, it could be to the detriment of the small firms that are needed to strengthen the recovery. 

“Growth and inflation have started to move in the right direction – according to data from the Office for National Statistics, it is the affect of the VAT increase which is the biggest driver of inflation at present. We believe that before a rate rise can be fully considered that we need to see entrenched economic growth. 

“As fuel is having a major impact on both businesses and the consumer we urge the Government to reassess its fuel stabiliser, announced in the Budget, so that it triggers an actual reduction in the duty paid.”