Slowdown will push rates lower, chambers predict

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The Independent Online
BRITISH BUSINESSES face "serious" threats this year that will force the Bank of England to eventually cut interest rates, the British Chambers of Commerce said yesterday.

The economy will slow this year - in the UK and globally, the employers' organisation said in its quarterly forecast.

"The UK economy is set to decelerate markedly," said David Kern, an economic adviser to the BCC, who forecasts GDP falling from last year's 3.1 per cent to 2.5 per cent this year and 2.3 per cent in 2006. "Consequently, the business climate will become riskier and more difficult over the next 12 to 18 months," he said.

Its report contrasted with Tony Blair's comments as he unveiled Labour's pledges to the electorate. A third-term Labour government would continue with the policies that have delivered economic prosperity. "We'll make sure that the British people get the economy that we need and also that we equip them for that economy in the 21st century," Mr Blair said.

The BCC forecast showed that the slowdown would be driven mainly by lower growth in household consumption, as the cooling housing market and the increased personal debt burden dampen personal spending. "Investment and exports, while stronger than in our previous forecast, are most unlikely to fill up the slack created by weaker growth in consumer spending," Mr Kern said. "The outlook for UK interest rates is uncertain ... but raising rates would be unnecessary and potentially harmful." He added: "We believe the base rate has peaked at 4.75 per cent and our central forecast envisages no change in the next five to eight months, followed by a cut to 4.50 per cent at the end of 2005."

The BCC added its voice to the chorus of warnings from independent think- tanks that Gordon Brown will break his "golden rule" on the public finances without another tax rise.

Mr Brown has committed himself to borrowing only to invest when averaged over the economic cycle, meaning he cannot end up in the red on day-to- day spending. The Treasury has consistently said it will meet its fiscal rules.