Southampton: BDO expects no rate rise for a year

The Bank of England’s current policy of pumping currency into the economy and maintaining interest rates at 0.5% is expected to continue until the final quarter of next year in order to balance low inflation and counter a likely increase in taxes, according to the latest Business Trends report by accountants and business advisers BDO Stoy Hayward LLP.

The BDO Inflation Index shows that, despite historically low interest rates and the unprecedented quantitative easing programme, price pressures in the economy remain low.

The index edged up in August to 92.0 from 91.0 in July and if inflationary pressures remain subdued as expected, Mervyn King will have licence to print more money and keep interest rates at 0.5% well into 2010.

In addition, the Output and Optimism indices, which measure short run turnover expectations and business confidence, point to an imminent end to the recession in Q3, with both indicators rising above the crucial 95 mark which indicates expansion ahead. Output and optimism for the manufacturing sector have climbed from a record low of 79.4 in March to 95.4 in August, signalling growth in the sector for the first time since July 2008.

Kim Hayward, partner at BDO Stoy Hayward in Southampton, said: “The fiscal deficit is expected to reach 14% of GDP so the Chancellor will believe that his key challenge for 2010 will be to address this. We are already seeing Alistair Darling move to plug the black hole, raising fuel duty by 2p and increasing VAT by 2.5% from 1st January 2010.

“However, there are very significant risks to this in a period when the economy is still very fragile. Consumer spending has helped keep the economy afloat but the Chancellor will have to throw consumers a life raft in 2010. This means a continuation of quantitative easing and low interest rates is almost inevitable.”