Dated: 9 March 2011

Ahead of tomorrow’s interest rate decision by the Monetary Policy Committee, Graeme Leach, Chief Economist at the Institute of Directors said:

“Be afraid, be very afraid. There is a very real possibility interest rates could rise at this month’s MPC meeting, with the decision on a knife edge. Obviously with inflation double the target rate and the oil price surging there is a very real challenge to the MPC’s credibility. But despite this threat, we think an interest rate rise at this stage in the recovery would be the wrong decision. Broad money supply growth remains anaemic and we are very concerned that hiking interest rates at such a time could further undermine the recovery.”

The IoD says that 5 forces should exert downward pressure on inflation as we move into 2012:

• Falling real household disposable income – The squeeze on household spending from higher inflation and taxation will weaken GDP growth.

• Household savings ratio – The potential stimulus from a falling savings ratio is much reduced in this recovery as compared to the early 1980s and 1990s.

• Money supply – It would be unprecedented to tighten monetary policy when the current rate of growth in the money supply (and the outlook, due to further de-leveraging in the banking sector) is so weak.

• Interest rates – The traditional interest rate stimulus to recovery is absent – the early 1980s and 1990s saw 500 basis points reductions in interest rates. Household and business expectations for interest rates are more likely to undermine than stimulate growth.

• Fiscal squeeze – Whilst the fiscal squeeze is right for the economy in the long-term, this does not mean that there will be no negative impact in the short-term. However, the risk is that abandoning the Spending Review could have even more damaging effects on the economy – due to the impact on financial markets and business confidence.

Graeme Leach added:

“Whilst a 25 basis point rise in interest rates might not appear much of a threat, the upward movement and turning point this early in the cycle risks a double-dip. We think the MPC needs to wait and see a little bit longer. There is no clear evidence of a wage-price spiral developing as yet.”