Influx of migrants to UK 'will mean no rate rise'

The influx of migrant workers into the UK will keep a lid on inflationary pressure and prevent the Bank of England from having to raise interest rates again, a leading international think-tank said yesterday.

But in its biannual assessment of the UK economy, the Organisation for Economic Co-operation and Development said cutting the deficit in the public finances would be a challenge.

The group cut its forecast for GDP growth this year to 2.6 per cent, down from the 2.8 per cent it had predicted in September.

The report had little impact on the pound, which vaulted the $1.95 barrier, increasing the chances of a two-dollar pound by Christmas. The pound rose as high $1.9528, up by more than a cent on Monday's close of $1.9363. The euro hit €1.4788 against the pound, after sterling's biggest gain in a month.

In its report, the OECD said UK growth would be driven by continued strong domestic demand, although strong growth in labour supply had driven up the unemployment rate.

"The resulting labour market slack should help to ensure that the anticipated fourth-quarter spike in headline inflation does not push up inflationary pressures," it said.

It expected inflation to move back to the 2 per cent target next year.

"Following recent monetary policy tightening, the case for further increases in interest rates is not compelling," the OECD said.

"There is greater than usual uncertainty over the outlook for inflation, which could be pushed higher by stronger growth, given the limited margin of spare capacity, or by any pick-up in wage inflation."

It added: "However, if migrant inflows continue to raise labour market slack, inflation could fall more rapidly back below the 2 per cent target next year."

Its argument mirrored the arguments laid out by Rachel Lomax, a deputy governor at the Bank, on Monday for her decision to oppose this month's rate rise.

The OECD also fired a warning shot across the Treasury's bows ahead of Gordon Brown's pre-Budget report next week.

It said that restraining spending growth and getting value for money out of current expenditure would be "crucial" in achieving a decisive cut in the deficit.

"Expenditure growth will have to slow considerably over the remainder of the year if the deficit target is to be achieved," it said.