Two more increases on the cards

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The Independent Online
Economists expect two more rate increases this year to slow the rate of growth and to sustain and keep inflation within the Government's target range, writes Diane Coyle.

Forecasts for growth and inflation calculated for the Independent by Kleinwort Benson compare what would happen if base rates stay at their current level of 6.75 per cent with the outlook if they rise to 7.5 per cent later this year.

Growth will certainly slow if interest rates rise again. But if they do not, it is clear the Government would have trouble staying within its 1-4 per cent target range for inflation.

As the Chancellor has said he would prefer inflation to stay in the lower half of that range, it might even be necessary for base rates to climb even higher than the consensus prediction of 7.5 per cent.

David Owen, Kleinwort Benson's UK economist, said: "It is an ambitious target. If the Bank and Treasury want to meet it, they will have to face the consequences."

Those will be grim for some businesses and households, even though companies and households generally have net savings rather than net borrowings. The Federation of Small Businesses said yesterday's base rate rise would take the borrowing rate for many businesses to above 9 per cent, and as high as 12 per cent in some cases.

Along with other business groups, the FSB predicts more business failures. Touche Ross, chartered accountants, reported that the number of business failures rose 20 per cent to 166 last month, perhaps reflecting weaker business confidence.

The feeble construction industry and housing market will certainly suffer more, too. Neil MacKinnon, chief economist at Citibank, said: "It might at last be possible to overturn the weight of economic history, and ensure sustainable growth and low inflation. There is a good chance interest rates will not need to swing as in the past."