CBI: Interest rates set to rise for 2011

20 December 2010

Interest rates will start to rise slowly next year reaching just below 2.4 per cent by the end of 2012, the CBI has forecast.

The CBI predicts that the Bank of England will start to raise interest rates gently beginning in the spring through to mid 2012. A slightly steeper interest rate will begin in the second half of 2012 to take the rate up to 2.75 per cent by Q4 2012.

The predictions are made in the employers’ organisation’s end-of-year economic outlook that suggests a 2 per cent growth in the UK economy for 2011.

This will rise to around 2.4 per cent growth for 2012, the CBI said, noting “a double dip back into recession to be low”.

“The pace of recovery is expected to slow to a very sluggish rate of only 0.2 per cent quarter-on-quarter in Q1 2011, when consumer spending falls slightly in response to higher VAT,” the report said. “Steady but fairly modest growth of 0.4 per cent, 0.5 per cent and 0.5 per cent is predicted over the remaining quarters of 2011.”

Quarterly growth rates are expected to pick up a bit more momentum during 2012, with the economy forecast to expand by 2.4 per cent over the year as a whole, which is rather subdued for this stage of a recovery.

The CBI expects inflation throughout 2011 to be higher than previously forecast, reflecting greater inflationary pressure from energy and commodity prices.

However, the consumer price index inflation “will significantly exceed the Bank of England’s 2 per cent target” in 2011 for a second year, mainly due to the impact of higher VAT. This upward push to inflation will end by Q1 2012, when inflation is forecast to dip just below target before ending the year at 2.4 per cent.

“The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected,” Ian McCafferty, CBI chief economic adviser, said. “And somewhat faster than typical during the first year out of a recession. But we do not expect that rapid pace of growth to continue over the next two years of recovery.

“What is striking is how little we see growth accelerating in 2012. Typically, by the third year of a recovery, growth would be more robust than we expect for either 2011 or 2012,” he said.