Research group in higher rates plea

INTEREST rates should be raised by at least a percentage point to 6.25 per cent in the coming year to signal the Government's resolve to keep inflation down, says the National Institute of Economic and Social Research, writes Robert Chote.

It says rising interest rates would slow growth and prevent unemployment falling below 2.5 million. But leaving interest rates unchanged would probably push underlying inflation above the 4 per cent ceiling of the Government's target range.

The NIESR, one of Britain's leading economic forecasting groups, predicted yesterday that the economy would grow 2.9 per cent this year before slowing to about 2.6 per cent in 1995. This was based on the assumption that base rates would rise to 6 per cent by the end of this year and 7 per cent by the end of 1995.

The institute said it would be best to wait for more evidence on wages and wholesale prices before raising rates. This would then need to be accompanied by structural measures to improve the economy's long-run growth rate and employment prospects.

The forecast was published as the Central Statistical Office revised growth figures for 1993 to take account of the recent quality audit of the trade figures. It raised its estimates of growth in the first and third quarters last year, taking growth for the year as a whole to 2 per cent from the previous estimate of 1.9 per cent.

The CSO also published figures showing that the construction industry stepped up output by 1.5 per cent in the first quarter of 1994, the biggest increase for four years.

It said that unadjusted figures for national spending suggested that growth may have been accelerating dramatically towards the end of last year after a slow first half. The raw national spending figures showed no growth in the first quarter, 0.3 per cent in the second, 1.3 per cent in the third and 1.1 per cent in the fourth. This may help to explain why unemployment dropped sharply late last year and pay settlements picked up.