BCC warns of danger ahead if Bank raises rates

A premature rise in interest rates by the Bank of England could crush the "green shoots" of economic recovery, industry leaders warned yesterday, as a new survey showed that firms chalked up a robust performance in the last three months of 2003.

Domestic sales, exports and investment intentions all improved, according to the British Chambers of Commerce quarterly survey. While service sector firms led the upturn, manufacturers also reported taking on more workers to deal with higher exports and home sales.

"I cannot remember a survey so positive," said David Kern, the BCC's economic adviser.

The positive picture painted by the BCC prompted fresh warnings from City analysts that the Bank could raise rates at its meeting next month.

"It is this sort of improvement in the data that should support the Bank deciding to tighten monetary policy in February," said George Buckley from Deutsche Bank.

Eagerly awaited government figures on fourth-quarter output published today will give further clues about the Bank's next move. Most analysts expect a repeat of December's quarter-point increase.

David Frost, the BCC's director general, warned that it would be a mistake for the Bank's monetary policy committee to raise rates so early.

"There are green shoots in this recovery, but let those shoots flourish before stamping down on inflation," he said. "The MPC must not raise interest rates prematurely."

The BCC survey showed manufacturers' export sales hitting a four-year high as orders rose to their highest level since before sterling's rise began choking off foreign demand nearly seven years ago.

The service sector showed improvements across the board, the BCC reported, with domestic orders at their highest level since the world economy began slowing down at the start of 2001.

Mr Kern said the improvement was welcome but should be treated cautiously. "Manufacturing remains weak, and the fragile recovery is vulnerable to higher interest rates and higher taxes."

The economy remained too dependent on public spending, the BCC said, while private sector companies were finding it increasingly difficult to recruit staff in the face of stiff competition from public sector organisations able to offer generous, taxpayer-funded pensions.

Firms are worried that with council tax rises provoking an electoral backlash, the government may allow local authorities power to start varying business rates.