A rise in UK interest rates over the next couple of months could derail the economic recovery, says a new report from accountants BDO. The report said that growth would remain sluggish and any imminent rate rise could prolong the weakness.
With inflation at twice the Bank of England's 2% target, many economists say a rate rise soon is highly likely. But BDO's business report said manufacturing could be hit, as a rate rise would strengthen the pound and reduce export competitiveness.
The report says that confidence in the manufacturing sector had risen to a seven-month high during February, with the BDO Optimism Index reaching 95.5. But despite the rise, it said medium-term prospects still looked bleak, with the index failing to reach the 100 mark, which signals sustainable economic growth.
"Tackling inflation is clearly at the top of the Monetary Policy Committee's agenda, but it could be a policy error to raise interest rates as early as April or May," said Peter Hemington at BDO.
"With growth forecasts remaining fragile for the next two quarters, attempts to tame inflation could push up the price of sterling and make exports less competitive, threatening what growth there is in sectors such as manufacturing."
He said that the MPC must "hold its nerve, or risk scuppering recovery prospects".
Meanwhile, the BDO's Employment Index rose to 97.8 in February, up from 95, marking the first significant improvement in employment prospects since summer 2010.