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March 14, 2011    

BDO warns of premature interest rate rise

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by Kay Murchie

Accountancy firm BDO has joined many other leading business groups by suggesting a premature interest rate hike could derail the economic recovery.

According to the latest Business Trends report, BDO said a rise in interest rates would strengthen the pound and therefore, reduce export competitiveness, having a negative impact on manufacturing.

The manufacturing sector, which accounts for around 13% of economic output, has been one of the bright spots in the UK economy, which suffered a shock contraction in the fourth quarter of 2010.

However, while many are calling on the Bank of England not to lift interest rates, economists believe a rise is likely very soon due to inflationary pressures.

Inflation is currently running at 4% – double the target but the central bank last week opted to maintain interest rates at the historic low of 0.5%.

Commenting on its report, Peter Hemington, a partner at BDO, said: “Tackling inflation is clearly at the top of the Monetary Policy Committee’s agenda, but it could be a policy error to raise interest rates as early as April or May.”

He explains: “With growth forecasts remaining fragile for the next two quarters, attempts to tame inflation could push up the price of sterling and make exports less competitive, threatening what growth there is in sectors such as manufacturing.”

BDO’s report comes just a week after the British Chambers of Commerce (BCC), called on the Bank not to increase interest rates too soon.

The BCC said the Bank should not risk economic growth by lifting rates.

Also last week, accountancy firm PricewaterhouseCoopers said the Bank should not raise interest rates before the economic recovery is secure – despite soaring inflation.

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