The bank rate is likely to rise to 5.75% by autumn this year in order to bring inflation back below target by the end of 2008, says the Confederation of British Industry (CBI).
Following its latest quarterly economic forecast, published last week, the CBI predicts that due to increasing inflationary pressures, there will be a quarter of a percent rise, from 5.5% to % 5.75% later this year, and then a reversal back to 5.5% by then end of next year.
The CBI says these higher borrowing costs will make economic growth slower in 2008 – this year’s growth rate is 2.9%, but, says the CBI, next year’s growth will fall to 2.4%.
“Though not a foregone conclusion, a further interest rate rise now seems more likely than not this autumn and we have built this into our forecast,” explained Ian McCafferty, CBI Chief Economic Adviser.
“Recent oil price rises, unexpected and sharp increases in food costs, higher than expected import prices and businesses rebuilding profit margins after last year's squeeze have all added to inflationary pressures.
“The economy will still enjoy above trend growth this year, with consumer spending remaining robust until the full effect of higher rates is felt later this year. Higher borrowing costs will make economic growth slightly weaker next year as consumer spending is reined in.
"This should allow the Bank to bring interest rates back down to 5.5 per cent in the second half of 2008. Despite the current speculation, we do not see the need for rates to hit the six per cent mark."
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