Interest rate rise could weaken fragile economy

Posted on March 14th, 2011 | Categories - News

Upping interest rates could badly affect the British manufacturing industry.

Strengthening the pound could lower competition in the export market.

Raising interest rates over the next two months could force the economic recovery to run off course, according to a new report.

Accountancy network BDO said that economic growth will remain slow and hiking up interest rates could prolong the weakness.

It added that the UK’s manufacturing sector would be particularly hard hit – a rate rise would strengthen the pound and therefore reduce export competition with other countries.

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 continued: “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”.

He added that the MPC must “hold its nerve, or risk scuppering recovery prospects”.

However, the likelihood of a rate rise in the near future does not seem high, according to economic experts. Just last week the Monetary Policy Committee decided to keep interest rates at the historic low of 0.5% for a further month as inflation remained at twice the level of the Bank of England’s 2% target.