Shop around for best fixed rate options as uncertainty over interest rates continues
Frank Peck is Economic Adviser to the FPB and Professor of Regional Economic Development at the University of Central Lancashire. He said further increases could restrict the growth of smaller companies. "The obvious problem with further rate rises is that uncertainty discourages investment, particularly for the expansion of smaller businesses who may have worries about the increased cost of borrowing. It is much more difficult for smaller firms to absorb short term variations in these costs. The MPC will certainly need to be aware of this in making its decision." But Professor Peck said that there were signs in April that inflation had dropped and that might mean interest rates remaining on hold. "What is interesting about the May rise in interest rates to 5.5% is that the decision of the MPC was unanimous - whereas meetings earlier in the year involved split decisions. The reason for this, quite simply, is that inflation unexpectedly rose in March to 3.1%, moving well away from the target for the Treasury. "However, we now have the April inflation figure* which shows a drop to 2.8%, suggesting that previous rises in interest rates are having an effect. Much depends on whether MPC members think they have done enough already and wait to see what happens when the May figures are published." He added that there is a consensus that interest rates at the current level can curb recent increases in inflation. "As regards the longer term, forecasts for 2008 published in May this year still show that the large majority of independent commentators (see Treasury Report May 2007) predict CPI inflation will be able to meet its target (2%) with interest rates held between 5% and 5.5%." The FPB is urging its members to make sure that they shop around to get the best deal if they are looking to take out a loan and is warning the Bank of England of the danger of putting the brakes on the economy if too many smaller companies decide not to expand their business.