CBI calls for caution on rate rises

The Confederation of British Industry today urged the Bank of England not to "overdo the rate rise medicine" as it cut its predictions for economic growth next year.

In its quarterly economic forecast, the CBI predicted that UK GDP growth would now average 3.4% in 2004 because of changes in the way in which government sector output is measured.

The employers' organisation expects reasonable but more moderate growth for next year, trimming its previous 3% forecast to 2.8%.

"That reflects a slower recovery in export growth than previously thought as rising oil prices hit demand from industrialised countries, together with a clearer moderation in UK consumer spending growth than previously projected," the CBI said.

With high oil prices likely to hit world demand and rising interest rates making UK consumers less willing to spend, the director-general of the CBI, Digby Jones, urged the Bank to slacken the pace of interest rate rises and not "overdo the rate rise medicine".

Mr Jones added: "After five increases since November, this forecast suggests that, combined with the impact on demand of recent oil price rises, the prescription so far may be almost enough to do the trick."

Earlier this month, the Bank's monetary policy committee raised borrowing costs by a quarter-point to 4.75%. The Bank's August inflation report, and minutes from its interest rate decision, show analysts believe that interest rates are now approaching their peak.

The CBI today said it believed that base interest rates would level out at 5.25% early next year. However, Mr Jones warned that the risks and uncertainties surrounding the forecast were greater than usual, saying that even this relatively low peak in base rates would be too high if global or domestic demand were to suddenly deteriorate.

There have been signs that the US economy is losing momentum, with job growth having virtually stalled last month.

However, the Federal Reserve still raised rates earlier this month, with its chairman, Alan Greenspan, saying the economy had hit a "soft patch" in June because of high oil prices.

The CBI expects oil prices to fall from their current highs next year, but they will still be up on previous forecasts. Oil is predicted to average $36.6 (?23.3) a barrel this year, and $31.3 in 2005. That compares with the $33.3 and $28.9 a barrel forecast in May.

In a separate report, the CBI detailed an order books rebound for British manufacturers during August. The CBI's monthly industrial trends survey said manufacturers planned to raise production in the next three months, despite high oil prices and rising interest rates.

The survey showed that 21% of firms said total order books were above normal while 19% said they were below. The balance of +2% was the highest since February 1998, well above the balance of -7 in July or economists' expectations of -5.

"Overall, this shows that July's dip in confidence was temporary and suggests the recovery remains intact," John Butler, an economist at HSBC, said.

"This is a stronger than expected survey, contradicting the view that growth is starting to slow and raising sufficient question marks about the outlook for future inflation."