CBI expects interest rates to rise in early 2015

The business group has increased its growth forecast from 2.6% to 3%, but warns of 'unsustainable' house price rises and meddling politicians.

by Rachel Savage
Last Updated: 12 May 2014

As the economic recovery continues to settle into a groove, the debate over when Bank of England governor Mark Carney will finally start to raise interest rates rumbles on. The CBI were the latest to set out their two cents on the issue this morning, hiking their growth forecast and pushing their prediction of a rates rise forward to the start of next year.

The business lobby group now thinks the economy will expand 3% this year, up from its previous prediction of 2.6%, and 2.7% in 2015, compared to 2.5%. That extra dose of optimism prompted them to shift forward when they think Carney will put up interest rates to 0.75%, to the first quarter of 2015.

Rates have been at a record low of 0.5% since March 2009, the longest period of unchanged central bank policy since the 1940s.

CBI director general John Cridland, presumably glad to talk shop after an embarrassing u-turn on its declaration of support for Scotland staying in the Union a couple of weeks ago, said the group ‘expect the recovery to broaden’. The group expects businesses to invest 8.3% more this year, above its previous prediction of 6.6% back in February and a contraction of 3.7% last year.

That’s good news for a more sustainable sort of economic growth, as opposed to debt-fuelled consumer spending. However, Cridland said the group ‘remain alert to the risks posed by unsustainable house price inflation’, which he noted has ‘reached double digits on some measures’.  The divide within the UK is pretty stark too: prices are 25% above their 2008 peak in foreign cash-flush London, compared to 2% below that outside the capital.

The CBI also had some strong words for politicians sizing up for the general election next year. ‘Political positioning must not be allowed to stifle investment, whether it’s an unrealistic immigration target, unjustified interventions into specific markets, flirting with leaving the European Union, delaying vital long-term infrastructure projects or restricting labour market flexibility,’ said policy director Katja Hall.

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