Scottish Chambers issues warning to Bank of England as rates remain on hold despite surge in inflation

The Scottish Chambers of Commerce has warned the Bank of England that it 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 per cent and the onus is now on Government to take steps to bolster demand and investment.

Yesterday’s decision to keep UK interest rates on hold came with the news that three of the Bank of England’s rate-setting committee backed a rate rise.

The 5-3 vote by the Bank’s policymakers was the closest for a rate rise since 2007, and comes with inflation close to a four-year high of 2.9 per cent.

Inflation is now well above the Bank’s target rate of 2 per cent.

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 per cent, 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.”

In the minutes of its meeting, the MPC said the “driving force” behind the recent pickup in inflation had remained the depreciation of sterling that followed the Brexit vote in June last year.

However, it added that a “number of indicators of domestically generated inflationary pressure” had also increased in recent months.

The committee said inflation could exceed 3 per cent by the autumn and was expected to remain above the 2 per cent target for an “extended period” as the weaker pound pushed up prices while pay growth remained “subdued”.