Calls for interest rate rise grow as Bank of England upgrades growth forecasts again

The Bank of England has upgraded their growth forecasts for the first quarter of this year again, citing soaring confidence in the manufacturing sector and the continued resurgence in consumer spending as the primary factors behind their decision to do so. 
The Bank upgraded their forecast for first quarter growth to 1%, up from the previous advancement of 0.9% made in March, and their initial forecast of 0.8% disclosed in the February Inflation Report. 
In particular, the Bank attributed their upgrade to a recent survey undertaken to gauge the attitudes within the manufactory industry which emphatically disclosed that confidence in the sector had risen to a 40 year high. 
“Growth in the second quarter expected to be only a little weaker,” minutes from April’s Monetary Policy Committee conference said. 
Capital Economics have now forecasted that on the basis of the Bankís remarks, the economy should grow by about 3.4% during the first quarter of this year, a significant rise from previous estimates made at the start of 2014. 
The Bank also had positive disclosures on the nature of the countryís economic recovery, arguing that recent economic data had suggested that it had begun to be fuelled by factors outside of consumer spending. 
The highlighted that “output had grown consistently across all sectors in January and February” with official statistics now indicating that the levels of growth being incurred by consumer spending are being matched by upward movement in the manufacturing sector, with the Bank now expecting a far higher contribution from the industry than previously. 
They also said that consumer spending should remain resolute and strong in the upcoming months as it continues to be upheld by low borrowing rates on mortgages and loans, though it forecasted that at least one of its policymakers on its Monetary Policy Committee will vote to raise interest rates prematurely as a result of the countryís staggering economic performance this year and the continued drop in unemployment. 
Earlier this week, it was revealed by the Office for National Statistics that unemployment had fallen to just 6.9% in the three months to November last year, down from the previous rate of 7.2%.
And Rob Wood, chief UK economist at Berenberg Bank, argued that policymakers will push for a premature rise in interest rates, despite the Bank keeping inflation below its target of 2%, as it becomes increasingly apparent that the market no longer requires access to cheap credit to prop up spending.  
“The economy appears to be booming right now, which, in our view, is likely to mean further tightening in the labour market and easing downward pressure on wages and inflation next year. We expect at least one of the rate setters to be voting for a rate hike by late summer, perhaps following the August Inflation Report,” he said. 
Michael Saunders, chief UK economist at Citibank, identified that a different Bank survey had indicated that the unemployment rate will continue to fall, as a number of employers questioned had signalled their intent to hire skilled servicemen in the near future, 
“The reading for hiring intentions, averaged across services and manufacturing, is the strongest since 1998. Hence, it seems likely that job growth will remain very strong, further reducing labour market slack,” he said.
ëRisks remain; growth could stay weak in the future
Despite the plethora of positive survey findings and statistics, the EY ITEM Club has warned that the countryís economic upturn could begin to fade away if measures are not taken to address its monumentally high current account deficit and the slow rate in which worker wages are picking up. 
“While wage growth is picking up, risks remain that growth could remain weak in the future,” said Martin Beck, senior economic adviser to the EY ITEM Club.
The EY argued that if interest rates were to rise in the next two years, and growth in wages did not begin to considerably outstrip inflation, that many householdís would be at risk of defaulting on their loans as the borrowing costs of their existing loans soar to an unmanageable level. Considering how high the current account deficit is at present in the UK, the likelihood is that a huge number of householdís would fall into this category, and will have to take measures to either cut down their expenditure or improve their salary in order to counteract the negative implications incurred by a rates rise in the future. 
However, another survey conducted by the Confederation of Business Industry (CBI) on Wednesday illustrated that confidence within the manufacturing sector was at its highest point in over 40 years, suggesting that a universal rise in worker wages in the country could be on the horizon as employers begin to expand and take more risks with their business. 
Optimism among British manufactures jumped in the three months to April, as producers became more optimistic about the outlook for exports and hiring.
The survey revealed that 41% of those questioned identified that they were optimistic about their businesses condition compared to just 8% who signalled that they were pessimistic. The positive rating of 33% represents the highest it has been at since 1973, and this new found confidence in the UK business sector has transmitted to order volumes as well, where statistics indicate that a positive balance of 21% of businesses have identified a rise in total new orders. 
 ìConfidence is rapidly rising among British manufacturers, with a real sense of business optimism,” said Katja Hall, CBI chief policy director. 
ìOur industrial base is seizing a bigger role in the UKís economic recovery, with output, orders and hiring all on the up.
Whilst the continents of the CBIís survey do not universally reflect attitudes in the UK business sector about their performance, their importance should not be neglected. The reality of the UKís current situation is that with personal household debt levels so high, and this actuality being promulgated by an extended period of cheap borrowing costs, that a number of indebted individuals will begin to struggle financially when interest rates eventually do rise; particularly those who pay their loans back on an interest only basis. 
In order for this inevitability to be counteracted, wages must pick up, and this can arguably only be achieved through the expansion of the countryís businesses and an improvement in their own financial condition. 
This improvement can then be passed on from employers to employees, which will be an organic method of improving consumer spending power, and this should deter people from acquiring further liabilities as their own salary should be sufficient to deal with the cost of living; something that has yet to be achieved in 2014. 

 

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