Interest rates will rise much earlier than expected next year as the UK’s recovery surpasses expectations, according to the CBI business group, which also warned politicians against jeopardising the rebound with pre-election soundbite policies.
The CBI now predicts 3 per cent growth this year, up from earlier estimates of 2.6 per cent. It believes the Bank of England will be forced into its first interest rate rise since July 2007 at some point in the opening three months of next year – earlier than the second quarter move previously guided by the Bank, and before May’s general election.
Katja Hall, chief policy director at the CBI, said: “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 EU, delaying vital long-term infrastructure projects or restricting labour market flexibility.
“Pre-election pledges should not deter overseas and home-grown investors and entrepreneurs, nor limit a future government’s ability to deliver prosperity in the UK.”
John Cridland, CBI director general, added that politicians must not “jeopardise” a recovery. “Businesses recognise the realities of election time but want all parties to ensure their policies make a positive difference. Politicians must be wary of the risk of headline-grabbing policies that weaken investment, opportunity and jobs.”
The CBI now expects unemployment to drop to 2 million by the end of next year. Business investment is forecast to grow at near-double digit rates this year and next.
Meanwhile in the United States, Atlanta’s representative at the Federal Reserve central bank said he expected its quantitative easing stimulus programme would end this year. Dennis Lockhart said the world’s biggest economy will expand at about 3 per cent in 2014, probably leading the Fed to stop its bond-buying in October or December.
The Fed has already cut back its vast QE programme of buying bonds, last month trimming the purchases by $10bn (£6bn) for the fourth straight month.
Mr Lockhart told an audience in Dubai: “Conditions will develop by the middle of next year, at which time we can conceivably begin a gradual process of raising [interest] rates.”