Business

Early interest rate rise a huge risk, BCC warns

people walking in the rain Image copyright Oli Scarff

A premature interest rate rise could present a "huge risk" to the British economy, the British Chambers of Commerce (BCC) has warned.

The business lobby group said the UK's dependence on consumer spending and mortgages meant it was "particularly sensitive" to interest rates.

The warning came as the BCC trimmed its growth forecast for 2014 to 3% from 3.2% and for 2015 to 2.6% from 2.8%.

It said the lowered forecast was an "ominous warning sign".

The group blamed lower-than-expected growth in services, household consumption and exports for the cut in its growth forecast.

"Downgrades to our growth forecast are a warning sign that we still face a number of hurdles to securing a balanced and sustainable recovery," said BCC director general John Longworth.

He warned that factors such as the weak eurozone economy, slowing growth in emerging markets and political uncertainty in Ukraine and the Middle East were hitting both business and consumer confidence.

The BCC's chief economist David Kern said the impact of these "unavoidable factors" meant low interest rates were important to "minimise the risk of the recovery stalling".

Seven-year high

Interest rates have been at their historic low of 0.5% for more than five years, with just two out of the Bank of England's nine-strong Monetary Policy Committee voting to increase rates in recent months.

The BCC expects a first interest rise to 0.75% in the third quarter of next year, with rates reaching 1.75% by the end of 2016.

Its prediction for growth this year is in line with the Office for Budget Responsibility (OBR)'s recent Autumn Statement forecast.

The government's independent forecaster expects 3% growth this year and 2.4% next year.

Despite the downgrade, if the predictions are correct, 2014 will mark the UK's fastest rate of growth for seven years.

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