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Interest rates “to hit 2.75% in 2012”
The Confederation of British Industry (CBI) has predicted that interest rates could rise to 2.75% by the fourth quarter of 2012, with inflation forcing the Bank of England to increase rates from their historic low this Spring.
The private sector employer trade body said that interest rates could reach 1.25% by the end of 2011.
The CBI added that it expected inflation to stay “stubbornly high” this year, partly due to the impact of higher VAT, but also due to pressure from rising energy and commodity prices.
However, while it continues to predict that the UK economy will grow in 2011, it has reduced its forecast for gross domestic product (GDP) from +2% to +1.8%.
Nevertheless, the CBI said the UK is on the road to recovery, with growth likely to accelerate in 2012, and maintains that the risk of a double dip into recession is low.
John Cridland, CBI director-general, said: “With household spending under some considerable strain, we will be looking to business investment and exports to help deliver economic growth over the coming two years.
“While this growth will still be lower than the long-term average and unemployment will continue to creep up, job numbers will also increase as the recovery picks up.”
Ian McCafferty, CBI chief economic adviser, observed that growth is far weaker than normally expected for the second and third year of an economic recovery.
“Persistently high levels of inflation, caused by rising energy, commodity prices and the VAT increase, are also a concern. This makes it more likely that the Bank of England will need to start putting up interest rates from their record low level from the second quarter of this year,” he said.
The economist said he expects unemployment to hit 2.71m by the end of 2011 but drop slightly to 2.64m by the end of 2012.