LONDON (Thomson Financial) - The robustness of UK business in the face of higher interest rates and a stronger pound will give the Bank of England room to raise borrowing costs still further, a leading business lobby said, but it warned that rate-setters could go too far.
"UK business has so far coped well with pressures after the latest interest rate rises, but we still warn of the risks from higher interest rates," said David Kern, economic adviser to the British Chambers of Commerce.
He was speaking at a briefing accompanying the release of the latest BCC quarterly survey, which showed a substantial improvement in manufacturing, with the picture on services more mixed but still pointing to robust levels of activity.
Although Kern expects that the Bank of England will raise interest rates at least one more time to 6.0 pct, he warned that rate-setters may be focusing too much on the need to dampen growth.
"Some of the arguments in favour of higher interest rates are not persuasive - the alleged pricing power argument is exaggerated, and the growth rate is in line with that of the last 15 years," he said.
"The way the monetary policy argument is structured at the moment this survey will support another interest rate rise before October, possibly as early as August ... But the risk is that they will go too far.
"We are calling for greater caution in order to avoid unnecessary damage to productivity," he said.
Kern argued that the "jury is still out" on whether the pace of growth is such that levels of demand and supply in the economy are out of kilter.
Citigroup economist Michael Saunders disagreed, however, pointing out that nominal GDP growth is "too high to be sustained in order to keep inflation at target".
Saunders, who attended the briefing, said the BCC survey shows signs that the disinflationary pressures that have come from the global economy in recent years are gradually becoming inflationary, with manufacturing prices picking up.
Nevertheless, there are also signs that interest rates are "beginning to bite" for firms -- with the survey showing a marked increase in concerns over rising interest rates -- and he believes this will mean only one more rate rise is necessary.
"There are signs that, perhaps because of higher debt levels, interest rates are beginning to bite. For that reason one more rate hike is probably enough, unlike the two or three more that the market is currently expecting," Saunders said.
The Bank of England has raised interest rates five times since August last year, with the latest quarter point rise last week taking the key repo rate to 5.75 pct, its highest level in nearly six years.
The BCC survey's findings showed that the manufacturing sector's home sales and orders were both at 12-year highs, while exports, investment and employment were also very strong. The performance of the services sector was mixed, showing strong home sales and improved levels of employment, but declines in home orders, exports and investment.
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