New interest rates rise 'unlikely

The Bank of England will probably not have to raise interest rates because of weaker growth prospects, the Organisation for Economic Cooperation and Development said today.

In its half-yearly snapshot of the global economy, the Paris-based thinktank said a marked slowdown in consumer spending meant the Bank was likely to meet its inflation target of 2% without having to increase borrowing costs, despite a pickup in inflation.

The OECD's outlook for UK interest rates tallies with forecasts from the City, which also believes interest rates have peaked.

With poor news from the retail sector coming from trading statements by companies such as Next and Dixons as well as official data, analysts now believe the Bank will hold rates at 4.75% for the rest of the year.

In a recent research note, John Butler, of HSBC, predicted borrowing costs would fall to 4% by the end of 2006 as worries about consumption outweighed concerns over inflation. Inflation has stood at 1.9% for the past two months, but the Bank attributes its rise to temporary factors such as higher oil prices.

In its assessment of the UK economy, the OECD said: "Despite the recent pickup in inflation, weakening growth prospects suggest that monetary tightening will not be required to maintain inflation close to the [2%] target."

The OECD predicted the British economy would grow by 2.4% this year and in 2006. That forecast is substantially below estimates by the chancellor, Gordon Brown, who has predicted growth of between 3% and 3.5% in 2005.

In particular, the contribution to growth from consumer spending was diminishing as the once-booming housing market cooled, the OECD said.

"The strong link between the housing market and consumer spending suggests that, even without any marked fall in the level of house prices, consumption growth is likely to remain modest," it reported.

The thinktank also said it could see little reduction in the government's budget deficit unless taxes increased or spending slowed.

"In the absence of an increase in tax rates ... additional revenues will be barely sufficient to cover the planned increase in nominal public expenditure of about 13% between 2004 and 2006," it said.

Meanwhile, data from the Office for National Statistics underlined the prospects for weaker growth. The ONS said business investment in Britain in the first quarter of this year had fallen for the first time since the start of the war in Iraq two years ago.

Business investment dropped 0.1% in the first three months of this year after having risen by 0.2% in the fourth quarter of last year. Investment was up 2.9% on the same period a year earlier.

Economists said the figures raised the risk that last month's preliminary estimate of GDP growth for the first quarter would be revised downwards this week, although the business investment series is notoriously volatile.

"All this points to a very bad mix of growth during the first quarter, when published tomorrow morning ...the fundamental risk going forward is clearly that the consumer is now slowing but the long-awaited cavalry in the form of investment, net exports and industry have yet to arrive," Mr Butler said.