Interest rate split prompts BCC warning

• Business leaders are warning the Bank of England against any upward movement in interest rates

The Bank's monetary policy committee will meet amid growing concerns that interest rates may have to rise owing to growing inflationary pressures. While the MPC is expected to leave rates at their historic 0.5 per cent low this month, a split is emerging among members.

Andrew Sentance broke ranks last month to vote for a quarter point hike. That has fuelled speculation that others may change their stance as consumer inflation remains stubbornly above target.

In a strongly worded call to the MPC, the British Chambers of Commerce today says low interest rates are "critical" to Britain's economic recovery.

The business group praises the measures taken by the coalition government in its recent emergency Budget to stabilise the public finances, but warns that the scale and severity "inevitably increase the danger of an economic setback".

Pointing to the ongoing fallout in the eurozone, and recent signs of a slowdown in the US, the BCC says it is "vital" that the central bank perseveres with expansionary policies.

David Kern, chief economist at the BCC, says: "We were disappointed and concerned that one MPC member voted for an interest rate increase at its last meeting.

"Raising interest rates too soon would be a major mistake. It would heighten threats of a major setback, which are particularly acute at this early stage of the recovery. Any thought of tightening policy must be rejected until the recovery is much more secure."

Minutes from June's meeting revealed a surprise divide over whether inflation would remain above or fall below the Bank's 2 per cent target in the medium term.

Although the committee voted 7-1 in favour of maintaining rates, it was the first time since the economic crisis that any member had made the case for tightening.

Although still above target, inflation eased to 3.4 per cent in May after hitting a 17-month high of 3.7 per cent the month before. Recent comments by three other MPC members - Paul Fisher, Adam Posen and David Miles - have indicated that they are not prepared to raise rates at present.

Nick Raynor, investment adviser at stockbroker, The Share Centre, noted that last month's minutes were sandwiched between reports from the Organisation for Economic Co-operation and Development (OECD) and Bank for International Settlements calling for certain central banks, including the Bank of England, to raise rates sooner than first planned.

"Although few expect the Bank of England to change interest rates or policy towards quantitative easing [this week], we are entering an interesting period," Raynor said.

Howard Archer, chief UK economist at IHS Global Insight, said: "We expect the Bank to keep the stock of quantitative easing unchanged at 200 billion for the rest of 2010 and at least the first half of 2011."