The Bank of England is walking a very narrow line on monetary policy and a rise in interest rates may come sooner rather than later following the narrow vote to maintain interest rates at 0.25% and the onus is now on Government to take steps to bolster demand and investment.

Liz Cameron, Chief Executive of Scottish Chambers of Commerce, said:

“This week’s higher than expected inflation rate has undoubtedly been a significant factor in a much more evenly balanced decision by the Bank of England to keep interest rates on hold this month. It seems clear that as the Consumer Price Index edges towards 3%, there is a strong case being made for interest rates to rise in the near future to keep prices under control.

“The problem that the Bank of England has that there are as many threats in terms of raising interest rates as there are in letting the inflationary pressures run their course. Expectations remain that inflation will remain above target for much of the next three years, but whilst the rate of inflation is not high by historic standards, it remains a problem because it is outpacing wage growth which, in turn, is being held in check by low productivity.

“As we have been saying for some time, the Bank of England has very little left in its arsenal to stimulate growth and that is why it is Government that must now come forward for a plan to stimulate investment and demand and get our economy back on track.”

The Bank of England is expecting three further years of above-target inflation in the UK, whilst GDP growth projections this year are down marginally this year to 1.9% but up slightly to 1.7% and 1.8% in each of the next two years.

Commenting, Liz Cameron, Chief Executive of Scottish Chambers of Commerce, said:

“There are twin challenges facing our economy at the moment in the shape of rising prices resulting from the fall in the value of sterling and weak consumer demand due to low real income growth, putting upward pressure on inflation and downward pressure on economic growth respectively. In addition, many businesses are experiencing a rise in their costs, putting upward pressure on prices and threatening their capacity to boost investment.

“We will be looking for next month’s General Election, whatever its outcome, to deliver greater clarity and stability. The next UK Government must act quickly to set out its agenda for Brexit, enhancing market confidence, and taking early action to tackle core business costs. Targeted tax reductions could play a key role here and help provide the boost that would stimulate improved levels of investment and new employment opportunities.”

Commenting on the Bank of England inflation report and interest rate decision published on ‘Super Thursday’, Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said:

“The Bank of England’s latest projections point to little change in outlook for the UK economy, compared to their February report, with only a slight downgrade for 2017. Significantly, the central bank see inflation as a greater risk to the UK’s growth prospects in the coming months.

“In our view the Bank of England’s forecasts are still too optimistic about the UK’s near-term growth prospects. We expect that inflation will weaken economic activity by more than the central bank is currently predicting, with wage growth likely to remain persistently below price growth over the next few years. Rising input costs faced by businesses are also likely to weigh more heavily on investment intentions than the Bank of England forecasts currently imply.

“The Bank of England is likely to face a major headache over the next few years as it seeks to strike a balance between managing a period of above target inflation and supporting more subdued economic growth. Longer-term uncertainty over the impact of Brexit on the UK economy is also likely to weigh on UK monetary policy decision-making. Against this backdrop, the most likely scenario is that the MPC will opt for a prolonged period of monetary stability and keep interest rates steady over the near term.

“Is vital that the next government addresses some of the longstanding issues facing the UK economy, including the relentless increases in the up-front cost of doing business in Britain, and investing in critical infrastructure to enable businesses to continue to drive investment, create jobs and boost growth.”