FSB: Interest rates should not be used as a short-term measure for inflation

The Bank of England must keep the base rate at 0.5 per cent until at least the third quarter of 2011, says the Federation of Small Businesses (FSB), and urges the Government to make this possible by introducing a true fuel stabiliser and signal that consumer taxes will not rise again.

Recent economic data has shown a weakening in manufacturing output and only a modest improvement in GDP and inflation. This, combined with the additional strain on the consumer as prices rise and wages not growing in-line with inflation, will pile on the pressure for the nation’s 4.8 million small firms.

In a new paper, Inflation v interest rates – the monetary dilemma and the effects on small businesses, the FSB is calling for:

The Monetary Policy Committee to:

. Reassess the base rate no earlier than quarter three and to keep the rate at 0.5 per cent until at least that point
. Plan a gradual path to increased rates, rather than impose quick and large increases only when the economy is strong enough

The Government to:

. Not impose any additional increases in consumer taxes that could lead to higher inflation
. Introduce a ‘true’ fuel duty stabiliser that would properly control pump prices and give greater cash-flow certainty to small businesses

Small firms’ confidence grew in the first quarter from -13.2 at the end of 2010 to +6.7, and the FSB believes that by reassessing the economic picture in the third quarter of 2011, would allow time to cement this growing optimism as well as ensuring that GDP and inflation continue to move in the right direction.

John Walker, National Chairman, Federation of Small Businesses, said:

“The problems facing the economy at the moment are worrying for small firms and we are pleased that interest rates were held at 0.5 per cent last week. We understand that rates need to rise to tackle inflation, but with businesses cash-flow and order books low and the consumer already facing a higher cost of living, it could be to the detriment of the small firms that are needed to strengthen the recovery.

“Growth and inflation have started to move in the right direction – according to data from the Office for National Statistics, it is the affect of the VAT increase which is the biggest driver of inflation at present. We believe that before a rate rise can be fully considered that we need to see entrenched economic growth.

“As fuel is having a major impact on both businesses and the consumer we urge the Government to reassess its fuel stabiliser, announced in the Budget, so that it triggers an actual reduction in the duty paid.”

ENDS

Notes to Editors

1. The FSB is Britain’s leading business organisation with over 205,000 members. It exists to protect and promote the interests of the self-employed, and all those who run their own business. More information is available at www.fsb.org.uk

2. The ‘FSB Voice of Small Business’ Index is a quarterly macro-economic report analysing the trends of small businesses in the UK market. Read the press release. The report, produced with the centre for business and economic research (cebr) is based on 1,710 responses from the March 2011 FSB ‘Voice of Small Business’ Survey Panel of FSB members which took place between 7 and 18 March 2011.

3. Office for National Statistics CPI bulletin March 2011; Impact of VAT increase on CPI and data tables.

4. A fuel duty stabiliser (FDS) should be based on official forecasts for the oil price cycle as advocated by the economist Andrew Lilico. This is the long term prediction economists give for patterns in fluctuations in the price of oil over a period of time. Using the oil price cycle as a basis for a FDS, the level of fuel duty would be calculated against a trend price for oil. This would then be adjusted following changes to the official view of the oil price cycle.

5. This means that any given time, setting the level of the stabiliser would be straight forward – fuel duty is X pence per litre minus a proportion of the difference between the current oil price and trend oil price. So when the price of oil fluctuates, fuel duty would automatically fall or rise accordingly.

ISDN facilities are available for broadcast media interviews

Contacts

Sophie Kummer: 020 7592 8128/ 07917 628998 sophie.kummer@fsb.org.uk
Prue Watson: 020 7592 8121/ 07825 125695 prue.watson@fsb.org.uk
Sara Lee: 020 7592 8113/ 07595 067068 sara.lee@fsb.org.uk

For regional FSB contacts please go to www.fsb.org.uk