UK growth to pick up - but big risk is higher energy prices

The International Monetary Fund gave its backing yesterday to the Bank of England's steady approach to interest rates when it raised its forecast for UK growth this year and stressed the need for the Bank's monetary policy committee to beware the knock-on effect of higher energy prices.

In its World Economic Outlook report, the Fund said it expected growth in Britain to pick up from 1.8% in 2005 to 2.5% this year, 0.3 points higher than it had been expecting when it made its last forecast in September 2005. In 2007, the IMF expected UK growth of 2.7%, 0.1 points down on its previous forecast.

It said there was a risk that growth could be lower than forecast in the event of renewed weakness in the housing market, noting that even after the recent slowdown in the pace of property inflation, house prices in the UK were still "richly valued".

The fund endorsed the quarter-point cut in interest rates from the Bank last August and said: "Monetary policy will need to focus on averting second-round effects of higher energy prices and ensuring that the recovery is sustained."

Following the government's decision to rein in spending growth and raise taxes on North Sea oil companies, the IMF softened its criticism of Gordon Brown's fiscal policies. Public debt would be stabilised at around 40% of GDP provided spending growth was restrained after 2008, but "greater efforts" would be needed to meet the government's more ambitious forecasts for the public finances over the medium term.

Separately, minutes from the MPC's meeting this month showed the members voted 7-1 in favour of leaving interest rates on hold at 4.5% for the eighth month, with only Steve Nickell voting for a cut.

The majority, reduced by one since Richard Lambert left to join the CBI, agreed there was little news over the previous month to change their view on rates. They remain concerned that rising energy prices could push up inflation at a time when house and share prices were already rising and might boost consumer spending.

Mr Nickell, who has voted for a cut for five months running, was more concerned about rising unemployment, higher energy bills and a higher tax take by the government, all of which would crimp consumer spending growth.