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."