BCC calls for caution on interest rates

The UK economy will continue to gather momentum, but the Bank of England should adopt a cautious policy on interest rates, the British Chambers of Commerce said today.

In a generally upbeat quarterly survey, the BCC said that a number of the key indicators were at their best level since 1997, with improved conditions boosting both the manufacturing and service sectors.

"This quarter's results are encouraging, especially for the manufacturing sector," David Frost, the BCC's director general, said.

"There are realistic prospects that Britain's recovery, which remains stronger than in the Euro area, will continue to gather momentum."

David Kern, the economic adviser to the BCC, said that the Bank of England would have to raise interest rates if the recovery accelerated, but called for caution.

"We urge them to maintain a cautious stance, taking fully into account the problems faced by the manufacturing sector and the strength of sterling," Mr Kern said.

The Bank's monetary policy committee this month kept interest rates at 4%, although many economists had expected a quarter-point rise because of a pickup in house prices and the continued strength of consumer demand.

One reason why the Bank may have decided to put off an interest rate rise was the weakness in official manufacturing data. The Office for National Statistics (ONS) reported an unexpected drop in manufacturing output of 0.6% in February, compared with the month before.

However, the BCC survey - which covered 6,149 companies employing 450,000 people across the UK - found that manufacturing employment had surged to its highest level for more than six years, while confidence was at its highest since 1999.

The BCC also said that the balance of factory-based firms reporting an increase in exports, despite the strength of the pound, stood at a seven-year high after a steady improvement late last year.

It warned that businesses should treat the progress with caution because of the weak output figures from the ONS.

Service companies remained buoyant, although the survey warned that their export markets were soft.

Within the domestic market, the performance of the service sector remained stronger than that of manufacturing, although the gap narrowed considerably for home orders.