Trade boom triggers fresh base rate fears

Published on Monday 15 January 2007 12:01

THE biggest boom in business in over a decade has sparked fears of further interest rate rises.

A report by Lloyds TSB has revealed that company confidence is at its highest level since the end of the recession in the 1990s and the bank says that plans by firms to increase prices in the next six months makes inflationary pressures "a concern".

The figures were revealed in Lloyds TSB's Business In Britain survey, which predicts that the strong rises in sales, orders and prices in the second half of last year will continue.

The report has been published just days after the Bank of England made the surprise decision to increase interest rates by a quarter-point to 5.25 per cent.

It says that UK business confidence is at its highest level since 1994, while a separate report by the Institute of Directors showed that capacity utilisation is higher than it has been since the winter of 1996.

But the report warns: "With UK firms planning to sharply increase their prices over the next six months, inflationary pressures remain a concern."

Diana Brightmore-Armour, chief executive of corporate banking at Lloyds TSB, said: "UK firms weathered the difficult trading environment of the last two years by cutting production costs and increasing their efficiency. This has put them in a great position to exploit the improved market conditions.

"By raising their prices companies have taken full advantage of stronger UK and global growth last year and we think 2007 will be another good one for UK company profits.

"Undoubtedly the service sector will continue to expand quickest of all, as strong global demand for UK business services and robust domestic conditions is a sure-fire recipe for success."

The bank's report, compiled from survey responses from more than 2500 UK firms, shows that during the last 12 months the net balance of firms reporting higher rather than lower sales almost tripled from 13 per cent at the start of the year to 37 per cent at the year end. In Scotland, 60 per cent of firms reported a sales increase.

And the bank said that last week's interest rate rise is unlikely to dent confidence, as 81 per cent of firms had said they expected a rise early in the new year. The balance of firms reporting increasing prices was 22 per cent, up from 17 per cent in June and zero in December 2005.

Meanwhile, the Institute of Directors report showed that industry is operating near to full tilt, with capacity utilisation at its highest point since 1996.

Graeme Leach, chief economist at the Institute of Directors, said: "Our survey shows there is very little spare capacity against a background of rising prices. The Bank of England was right to opt for a little more pain now than a lot more pain later."