THE Scottish Chambers of Commerce yesterday urged the Bank of England to stay its hand over increases to interest rates, and stressed the need for inequality in the UK property market to be tackled by other means.
Chief executive Liz Cameron said a stiffer-than-expected increase in the rate of inflation was not cause for a rate rise, despite Bank governor Mark Carney hinting that action could come sooner than many had previously expected.
New figures from the Office of National Statistics showed the consumer price index rose sharply to 1.9% last month, but continued to enjoy its longest stretch at or below the official 2% target for nine years.
The hike from May’s 4-year low saw the CPI climb to its highest rate since the start of the year, and is expected to put more pressure on policymakers following a five-year period in which interest rates have been held at a record low of 0.5%.
Ms Cameron said clothing and footwear were now more expensive than they had been 12 months ago as the timing of sales and discounts had shifted from their regular patterns.
She also argued that rises in air fares during the busy holiday period, and a return to normal food and drink prices following heavy promotion during May, had helped push CPI higher.
But the head of Scotland’s Chamber network said there was still no need to match the rises with a lift in the baseline interest rate.
“Whilst a rise in inflation has been experienced, it is important to note that the rate remains below the Bank of England’s target of 2.0%,” Ms Cameron said.
“Therefore, there is no immediate pressure to increase interest rates as these figures indicate the seventh consecutive month in which inflation is below the target of 2.0%.”
However, she did urge action to close the gap between a booming housing market in England and more sustainable rises north of the border, in an effort to ensure Scotland does not experience a destabilising market bubble.
“Further statistics continue to show the cross-border asymmetry in housing prices, with house price annual inflation at 11.0% in England compared to Scotland’s much lower rate of 3.6%,” she added.
“Therefore, it is imperative for the Scottish economy that the Bank of England address the rise in UK house prices by exploring the use of alternative measures, such as an increase in the number of houses being built as well as a rise in rental capacity, and do not only consider increasing interest rates.”
Yesterday’s data also showed the Retail Prices Index (RPI) measure of inflation, which includes housing costs, rose from 2.4% to 2.6%.
Sterling rose above the $1.71 mark on expectations that the latest figures will increase the chances of an interest-rate hike.
But Samuel Tombs, of Capital Economics, said the sharp rise in inflation was likely to be reversed soon, with the supermarket price war meaning a significant rise in food price inflation seemed unlikely.
He said the full impact of the strong pound was also yet to be felt, while a fall in wholesale gas and electricity prices could dampen energy bill hikes this winter.
“We maintain our long-standing forecast that CPI inflation could ease to about 1% by the end of this year, and remain below the 2% target in 2015,” he said.
Meanwhile, Bank of England governor Mark Carney yesterday said there was no need to reverse a runaway rise in house prices, telling MPs his officials are not currently considering further measures to cool the market.
Dr Carney was being questioned by the Treasury Select Committee at Westminster after the Bank’s Financial Policy Committee (FPC) last month announced plans to curb riskier mortgage lending.
His remarks came as the latest official figures showed house prices in London rising at a record annual rate of 20.1%, while climbing by an average of 10.5% across the UK.
Dr Carney reiterated his belief that “issues associated with housing” posed “the biggest risk over the medium term to the durability of the expansion” in the economy.
But the governor said the FPC’s measures which include a new cap on high loan-to-income value loans and stronger affordability “stress tests” for borrowers were an “insurance policy” rather than an attempt to reverse increases.
“The reason we took out insurance as opposed to trying to reverse activity is because we are in a low-interest environment for which a high-ratio mortgage could be appropriate,” Dr Carney told MPs.