Rates 'will have to rise to 8.5%'

Interest rates will have to rise to 8.5 per cent by the beginning of next year if the Government is to meet its inflation target, warns the National Institute for Economic and Social Research in its latest review.

If interest rates are held at their current rate of 6.75 per cent, inflation would continue to rise, probably exceeding 4 per cent next year, well outside the Government's ultimate target for inflation of 1-2.5 per cent by the end of this parliament.

The Institute criticises the decision by Kenneth Clarke, the Chancellor, not to raise interest rates on 5 May, saying that it could jeopardise the Government's ability to achieve its goal of low inflation. "The credibility of the authority's commitment to the inflation target received a setback."

The blow to credibility matters, the review argues, because it makes it more costly to achieve the objective of lower inflation. If the Government's commitment to its inflation target were believed, interest rates would fall to reflect lower expected inflation. The exchange rate would also appreciate.

Instead, however, interest rates would have to be raised and kept above world rates. The fall in the pound this year, the Institute says, may reflect doubts about the conduct of monetary policy in the UK.

The review forecasts that the economy will grow at 3.5 per cent this year, slowing down to 2.6 per cent in 1996. Trade will contribute about 1 per cent to the growth in GDP in each year, with exports continuing to increased sharply on the back of the competitive pound. Manufacturing will continue to be favoured with growth above 4 per cent in each year.

By contrast, the growth in consumer spending will be sluggish at 2.5 per cent in 1995 and 2 per cent in 1996. Consumption will be held back by the burden of rising taxes and a reluctance to dip into savings while debt remains high and the housing market is so fragile.

"The weakness of the housing market is perhaps the main reason why the recovery is, and will remain, rather hesitant and patchy."

The Institute points to substantial inflationary pressure from the rise in the cost of imports. However, this is being held at bay by the weakness in labour costs. This may continue because there is more slack in the labour market than the fall in unemployment might indicate.

A good part of the reduction in the number of jobless, the Institute suggests, has been caused by a crackdown on benefits. Even so, it is forecasting an acceleration in earnings growth from its current rate of 3.5 per cent to nearly 5 per cent next year.

Start your day with The Independent, sign up for daily news emails
Voices
Barn owls are among species that could be affected
charity appeal
Sport
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
Life and Style
food + drink
Voices
John Profumo and his wife Valerie Robson in 1959
voicesWard committed no crime, and the truth is still being covered up, writes Geoffrey Robertson QC
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
news... you won't believe how bad their skills were
News
people

Arts and Entertainment
Mark Wright and Mark Wright
tvStrictly goes head-to-head with Apprentice
Sport
footballPremier League preview: All the talking points ahead of this weekend's clashes
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas