A business group has warned that an early rise in interest rates would be “premature and risky” as it predicted economic growth would be lower than previously thought, while unemployment is likely to be higher.
The British Chambers of Commerce (BCC) said Tuesday it expected the Bank of England to increase the base rate in May, but it said the fragility of the recovery and the tough fiscal measures expected in the Budget meant a hike would be “premature and risky”.
The group said interest rates were likely to end 2011 at 1.25 percent, increasing to 2.5 percent in the final months of 2012.
But it said that while such a move was not likely to push the economy into a new recession, it would slow growth and add to the jobless total.
The group has revised down its GDP forecast for 2011 from 1.9 percent to 1.4 percent, due to the unexpected fall in economic growth during the final quarter of last year, as well as the prospect that rates could rise during the second quarter.
It is also expecting unemployment to be higher than it previously predicted at 2.65 million by early 2012, up from its earlier forecast of 2.6 million.
But the BCC said it now thought the economy would recover quicker in the medium term, and it has raised its estimate for GDP in 2012 to 2.3 percent, up from 2.1 percent.
David Kern, BCC chief economist, said “While a new recession can be avoided, economic policy must focus on limiting the risks of a new major setback.
“Despite concerns around inflation, it is important for the UK to maintain an expansionary monetary policy with very low official interest rates until later in the year.”
Going forward the group expects sharp increases in the prices of oil, food and other commodities to contribute to weaker growth and higher inflation, with the Consumer Prices Index peaking at 4.5 percent and remaining well above 3 percent until the final months of this year, before falling back to 2.3 percent in 2012.
It added that spending cuts, consumer debt and measures to strengthen the banks would all present major medium-term challenges that would limit economic growth.
It expects GDP to average just over 2 percent a year up to 2015, well down on the 3 percent average annual growth seen between 1993 and 2007.