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Interest rates don't have to rise

24/07/2006

The Item Club, which uses the Treasury's own economic model to gauge the UK economy says the Bank of England has enough slack to keep interest rates at 4.5%.

The forecast comes as other analysts still believe the Bank's Monetary Policy Committee will have to raise interest rates this year, but Item said the base rate would remain at 4.5% as CPI inflation eases back from June's 2.5% to 1.8% by the end of next year.

Rising oil and commodity prices will slow growth, said the group, allowing the Bank enough slack in the economy to leave rates on hold. Also, consumers and the government are cutting back on spending which could see inflation slip below targets of 2% and so negate the need to raise rates.

Recent surveys and forecasts have painted a picture of a UK economy that is happily coasting along in second gear in the inside lane, said the report. Interest rates remain low, the housing market and high street show patchy optimism and unemployment, whilst rising, is accompanied by the growth in numbers of full time jobs.

However, there may be trouble ahead, said the group which is forecasting UK output should grow by 2.5% this year with growth next year edging down from 2.6% to 2.5%, while that for 2008 is down from 3.0% to 2.8%.