After revising the growth outlook for British economy downwards, the British Chambers of Commerce (BCC) has also pushed back its forecast for when Bank of England will raise the benchmark interest rate, citing tough inflationary conditions and the government’s deep spending cuts.
The BCC has revised the economic growth for the current financial year to 1.3 percent from its March forecast of 1.4 percent. It also scaled down next year’s growth forecast to 2.2 percent from 2.3 percent.
However, the UK government’s Office for Budget Responsibility has forecasted a growth of 1.7 percent in 2011 and 2.5 percent in 2012. The Organisation for Economic Cooperation and Development (OECD) has also reduced Britain’s economic expansion projections to 1.4 percent for 2011 and 1.8 percent for 2012.
The business group also predicted that the government will raise the key interest rate from the present 0.5% to 0.75% in August this year. Though the BoE has been keeping the rates down to stimulate growth, BCC said high inflation will force the central bank to raise rates in August. Rates will touch 1 percent by the end of this year and will climb to 2.75% by 2012, BCC said.
“This forecast suggests that the economy is still facing difficult challenges in the years ahead”, said David Frost – director general of BCC.
“Although growth will be slow, the government is right to persevere with its plans to cut the deficit”, he added.
The Consumer price Index (CPI), an indicator of headline inflation, will remain at 4.5 percent his year and will come down to 2.7 percent in 2012, the business group predicted.
“Although we would prefer to see interest rates held until the fourth quarter, we believe British businesses will be able to absorb small increases”, chief economist of BCC David Kern said.
“But the MPC (Monetary Policy Committee) must act with great caution and must not be too aggressive in its tightening”, he warned.