New rate rsie fails to dent confidence

The November base rate rise failed to dent UK business confidence, according to this month's Business Barometer from Lloyds TSB Corporate Markets.

The survey of firms, taken just after last month's MPC decision to raise interest rates to 5%, shows 54% of firms were optimistic about the general economy, compared with 36% the month before. This represents a net balance (the number of firms more, rather than less, optimistic) of +27, up from +11 in October and the highest level since June this year.

In addition, there has been a slight month on month rise in business confidence, with 59% forecasting a rise in their activity the next year, up from 56% last month.

Within the data, business confidence increased significantly among service companies and distribution firms. The service industry remains the most confident, with a net balance of 73% of companies in the sector forecasting a rise in business activity, up from 60% in October.

Optimism also rose among firms in the Midlands and the North. In the Midlands, the net balance of firms showing optimism rose by 14% to 53% in November. In the North it was up 8% to 60%.

Trevor Williams, chief economist at Lloyds TSB Corporate Markets, said: "UK firms saw this latest interest rate rise coming, which could explain why it hasn't made a dent in their outlook. In fact, the opposite has happened, with businesses more optimistic about the general economy than they have been in the last six months."

Williams adds that if the strengthening in economic growth continues into 2007, it begs the question of how much producer price rises and wage increases will be passed on to customers. If there is evidence this is happening, it may increase the Bank's willingness to raise rates beyond their current level. But the main message has got to be that manufacturing recovery in the UK isn't a flash in the pan, but should persist into 2007.

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