Triple interest rate rise threat
Twenty UK manufacturing trade associations representing more than 13,000 companies have written to the Bank of England to express their "deep concern" about the level of interest rates.
The Bank's Monetary Policy Committee meets this week for its regular monthly decision on rates, and the manufacturers want to persuade it that another rate rise would be unnecessary and damaging.
The Bank of England, the Federal Reserve, and the European Central Bank (ECB) are all due to announce interest rate decisions this week, in what could mark a decisive change in the world economic climate.
The UK trade associations represent major industries such as steel, chemicals and electronics, employing two-million people. They say the Bank of England must either not know or not care about how serious their problems are.
While they accept that the outlook has improved recently, they say the Bank is risking making it much worse again.
The low rates of recent few years have boosted economic growth, especially in the United States, as well as moderating the effects of the world financial crisis and leading to a stock market boom.
But now central bankers are getting worried that inflationary pressures may return.
The US central bank, the Federal Reserve, has already raised rates twice, while the Bank of England surprised the markets by following suit last month.
Now, with the first signs of inflationary pressure in Europe, there are concerns that the ECB might follow suit.
Any co-ordinated action to raise rates, however, threatens to depress stock markets, which are already worried by the change in climate.
And it could lead to higher unemployment, especially in Europe, where it already tops 10%.
Fed first
The Federal Reserve will move first, announcing its decision on Tuesday.
There are fears that even if the central bank does not raise rates, it will announce a "bias towards tightening", signalling a rate rise in the future.
Fed watchers have been worried by the higher raw materials prices reported by the manufacturing sector last week, which could feed into price hikes in the shops. Up to now, the low price of raw materials like oil has helped keep the lid on inflation.
There are also concerns that the US consumer spending continues to boom, with people borrowing to spend rather than saving their income.
But with the overall level of inflation still low, the Fed could wait and see whether its two interest rate raises have any further impact.
"It'll be a bit of a closer call than it was before," said David Hale, chief global economist at Zurich Group.
UK fears house price boom
The Bank of England's Monetary Policy Committee, which begins its two-day meeting on Wednesday, will also be split over the prospect for inflation.
Its main worry is that UK house prices appear to accelerating, with the Nationwide reporting a price rise of 11% year-on-year. It was a huge house price boom in the l980s that last destabilised the UK economy.
It has also seen evidence that manufacturers are growing more optimistic, despite the high pound. But with sterling nearly at an all-time high against the euro, it may worry that further interest rate hikes will make Britain's manufacturers more uncompetitive. The Engineering Employers Federation will warn this week that export prospects remain depressed.
Already the tight labour market is beginning to force up wages, with electrical workers winning a 30% wage increase last week from building contractors.
"Base rates are going up. The only question is timing," said Gerard Lyons of Standard Chartered Bank.
ECB: joker in the pack
And for the first time, economists believe there is a real chance that, when it meets on Thursday, the European Central Bank will raise rates from their current level of 2.5%.
European growth appears to be recovering and inflationary pressures are now growing, according to ECB chief economist Otmar Issing.
"We have already said in July that downward risks for prices disappeared in May and we had a stable situation then. Now there's a risk on the upside," he said on Friday.
And ECB vice president Christian Noyer warned earlier that the central bank may have to act earlier rather than later to head off inflation.
"We think the Fed will hold off but announce a bias towards tightening, the Bank will announce a quarter-point increase, and the ECB will do so too," said Nick Stamenkovic of Ideaglobal.com.
It will not be a prospect relished by the world's stock markets, which have been languishing since the summer.
But, paradoxically, it may be a sign that the world's major economies have recovered more quickly than expected from last year's financial turmoil. |
