May 30, 2011 / 9:58 AM / 7 years ago

Business group cuts growth forecast, sees rate rise

LONDON (Reuters) - The British Chambers of Commerce (BCC) cut its growth forecasts for this and next year on Monday, pointing to the impact of the government’s tough fiscal policy and high inflation on consumers’ ability to spend.

An elevated view shows the financial district of the City of London April 12, 2011. REUTERS/Toby Melville

The BCC reduced its forecast for gross domestic product (GDP) growth in 2011 to 1.3 percent from a previous prediction in March of 1.4 percent. It reduced its forecast for 2012 to 2.2 percent from 2.3 percent.

That would argue for the Bank of England continuing to keep interest rates very low to support growth, but the BCC also raised its forecasts for inflation and said that would lead the Bank to raise rates for the first time in August.

The business lobby said the government’s tough austerity measures to cut a record budget deficit, combined with higher than expected inflation, would squeeze disposable incomes, meaning economic recovery would be slow over the next 18-24 months.

“This forecast suggests that the economy is still facing difficult challenges in the years ahead,” said David Frost, director general of the body, which represents companies employing one in six UK workers.

“Although growth will be slow, the government is right to persevere with its plans to cut the deficit.”

The government’s Office for Budget Responsibility has forecast growth of 1.7 percent for this year and 2.5 percent for 2012.

Last week, the Organisation for Economic Cooperation and Development (OECD) also revised down its growth forecast in a twice-yearly report, projecting a 1.4 percent expansion for this year and 1.8 percent in 2012.

The economy’s sluggish growth has reinforced expectations that interest rates will stay at record lows for some months to come, despite inflation climbing to more than double the Bank of England’s 2 percent target.

The BCC saw the annual headline CPI inflation rate at 4.5 percent in 2011 and 2.7 percent in 2012, up from 4.2 percent and 2.3 percent respectively.

However, it predicted that unemployment would peak at 2.6 million, down from the 2.65 million it predicted in March.

The BCC said it expected interest rates to rise in August and to reach 1 percent by the end of the year, climbing to 2.75 percent by the end of 2012.

“Although we would prefer to see interest rates held until the fourth quarter, we believe British businesses will be able to absorb small increases,” said David Kern, the BCC’s chief economist.

“But the MPC (monetary policy committee) must act with great caution and must not be too aggressive in its tightening.”

Reporting by Michael Holden; editing by Patrick Graham

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