Small businesses could be expecting some doom and gloom in the New Year, according to the minutes from a meeting of the Bank of England’s Monetary Policy Committee (MPC).
The MPC have voiced serious concerns about the risk of inflation. It’s believed that the recently published minutes clearly indicates a three-way split amongst the committee:
• Andrew Sentance voting for a small increase in the national base interest rate (from 0.5 – 0.75%).
• Adam Posen voting for an increase of £50 billion in Quantitative Easing (QE) (from the original £200 billion already pumped into the economy).
• The remainin members are in favour of supporting the existing policy in place with no changes to either interest rates or QE.
The meeting was called towards the begining of December with the Eurozone debt crisis threatening to overshadow everything. However, of primary concern was the increase in inflation with a 3.3% rise in the Consumer Prices Index (CPI)
Economics experts in the City remained unsurprised by the split amongst committee members. Vicky Redwood at Capital Economics commented:
“Although the MPC thought that the risks to inflation had shifted upwards a bit, it also noted the heightened risks from the eurozone and reiterated its view that the economy still has a lot of spare capacity.”
With the iminent increase in VAT to 20% in January 2011 it’s believed that inflation will get yet another boost at the begining of the year with many MPC members believing that CPI could hit 4% by the second quarter. This is twice the official 2% target set by the present Government. In spite of this the MPC is not expecting to increase borrowing costs for many months.
David Kern, Chief Economist at small business group, the British Chamber of Commerce (BCC), commented:
“We understand the committee’s concern about the risks of higher inflation, and appreciate that in due course interest rates will have to increase. However it is important not to increase rates at a time when fiscal policy will soon be tightened, with higher VAT and large spending cuts planned for 2011.
“To increase interest rates at the moment would be a big mistake, escalating the risk of a setback to the economy. While we support the painful measures that the Government is taking to reduce the deficit, they will only succeed if economic growth continues. Interest rate increases should only be considered when the recovery is more secure.”