23.09.09 0.5 PER CENT INTEREST RATES EXPECTED UNTIL AT LEAST Q4 2010 Quantitative easing and low inflation rates likely to counter higher taxes next year The Bank of England’s current policy of pumping currency into the economy and maintaining interest rates at 0.5 per cent 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 per cent 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, says: “The fiscal deficit is expected to reach 14 per cent 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 two pence and increasing VAT by 2.5 per cent 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.” -Ends- Words: 340 For more information or for the full report, please contact Laura Gainsford at Blue Rubicon on 020 7260 2700 in office hours, Laura Clare on 07789 601994 if over the weekend or Lindsay Kennedy at BDO Stoy Hayward on 07800 682941. Notes to editors: Methodological notes: The BDO Stoy Hayward Business Trends Report Indices are calculated by taking a weighted average of the results of all the UK’s main business surveys carried out during the last month. The BDO Stoy Hayward Monthly Business Trends Indices are prepared on behalf of BDO Stoy Hayward by the centre for economics and business research (cebr). Taken together the surveys cover over 11,000 different respondents from companies employing approximately five million employees. The respondents cover a range of different industries and a range of different business functions. Together they make up the most representative measure of business trends available. The surveys are weighted together by a three-stage process. First, the results of each individual survey are correlated against the relevant economic cycles for manufacturing and services. This determines the extent of the correlations between each set of survey results and the relevant timing relationships. Then the surveys are weighted together based on their scaling, on the extent of these correlations and the timing of their relationships with the relevant reference cycles. Finally, the weighted total is scaled into an index with 100 as the mean, the average of the past two cyclical peaks as 110 and the average of the past two cyclical troughs as 90. The results can not only be used as indicators of turning points in the economy but also, because of their method of construction, be seen as leading indicators of the rates of inflation and growth. About BDO Stoy Hayward LLP: BDO Stoy Hayward LLP operates across the UK with over 3,000 partners and staff. BDO Stoy Hayward LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO international is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in The Netherlands, with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. In the UK the Belfast Firm is operated by a separate Partnership known as BDO Stoy Hayward - Belfast. BDO Stoy Hayward LLP and BDO Stoy Hayward - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business. BDO Stoy Hayward LLP and BDO Stoy Hayward - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business. BDO Stoy Hayward is an award winning firm. Recent achievements include: • Best Workplace UK - Financial Times 2008 • Audit Team of the Year – Accountancy Age Awards 2008 • Tax Team of the Year – Accountancy Age Awards 2008 • Corporate Finance Deal of the Year – Accountancy Age Awards 2008 • 100 Best Companies to Work For - The Sunday Times 2008 • The Women of Achievement Award – Women in the City 2008 • Business Superbrand - Business Superbrands 2008