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.”

Scottish Chambers of Commerce have welcomed the news that Scottish unemployment fell by 17,000 and employment rose by 14,000 in the three months to April, but has called for continued action to make sure that this trend continues in future.

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

“Not only has Scotland’s unemployment rate fallen sharply, but our employment rate has increased substantially too. This is particularly good news at a time when there has been heightened uncertainty in terms of the Scottish and UK economies and is an indication that businesses continue to have the confidence to hire and invest in their workforce.

“There remain some areas of concern, however; not least the news that average earnings are continuing to lag behind inflation. Low productivity rates dictate that earnings growth may be unlikely to improve significantly over the short term and, with inflation having risen by more than expectations, the pressures on consumer demand, business margins and future business investment continue.

“Scotland has also experienced a significant rise in the number of people dropping out of the labour market altogether over the past year. Coupled with continued reports of hard to fill vacancies amongst Scottish businesses, this underlines the need for government to increase investment in training opportunities, not only for young people, but also for older workers to enable people to upskill and reskill and get back into the workforce.”

The news that inflation has risen to 2.9% has reinforced the case for a temporary reduction in VAT, according to the Scottish Chambers of Commerce.

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

“This week we have learned that household spending has fallen for the first time in four years, which comes as no surprise given continued high inflation, which has been outpacing increases in earnings. This is an early warning sign that there is a real threat to our economy from a decline in consumer spending power.

“Although the political situation at Westminster has not yet fully settled down following last week’s General Election, the continued elevated rate of inflation above the Government target of 2% calls for urgent action to address the impact this is having on businesses and consumers.

“At the time of the financial crisis and recession in 2008-09, the UK Government reduced VAT on a temporary basis in order to bolster consumer demand and it is time that such a move was considered again to give people the confidence to spend and to reduce the pressures on business margins. Everything possible must be done to maintain consumer confidence in these uncertain times to provide a route to business growth and economic prosperity.”