Leading UK business group predicts interest rate rises in Spring 2010

The Bank of England will start to raise interest rates in spring 2010, far earlier than most commentators and despite what is likely to be a subdued economic recovery, it is claimed.

It added that rates would stay at 2% throughout 2011 as relatively loose monetary policy will be needed to help sustain the economic recovery when fiscal pullbacks begin.

Few other groups expect such an early rise in interest rates. Most analysts are predicting that while inflation has repeatedly overshot in 2009 it will begin to come down again by the middle of next year and therefore rate hikes may not be on the horizon until the end of 2010 or maybe as late as 2011.
The CBI also predicts subdued growth for 2010 and said that GDP is unlikely to have reached pre-recession levels by the end of 2011.

Overall growth in the first two quarters of 2010 will be weak at 0.3%, but this should strengthen as the global economic recovery gathers pace, the CBI said. It predicts annual UK GDP growth of 1.2% in 2010 and 2.5% in 2011.
‘We will need to keep our nerve during early 2010, and there is no sign of a clear driver of strong economic growth,’ said John Cridland, CBI deputy director general. He added that aid there will be more job losses in 2010 and unemployment will peak at just over 2.8 million in the third quarter of 2010, below the three million many had been forecasting.

The CBI has been particularly bullish about the state of the UK economy throughout the downturn, first suggesting we would avoid recession in the summer of 2008, then suggesting the recession would be shallow and then last year saying the recession would last only five quarters.