Bank of England May Raise Rates to 5% by 2005, ITEM Club Says
Jan. 18 (Bloomberg) -- The Bank of England may increase interest rates to 5 percent by the beginning of next year to damp consumers' borrowing, according to a forecaster sponsored by Ernst & Young LLP.
The U.K. central bank will raise borrowing costs next month and boost its benchmark rate to 4.75 percent by the end of this year, said the ITEM club, an Oxford, England-based group that uses the Treasury's economic model for its forecasts.
The bank ``is likely to focus on the debt problem and continue to raise interest rates this spring,'' the ITEM Club report said. ``Nevertheless, the downside risks to the recovery mean that it is likely to tread carefully.''
Record employment, interest rates near a half-century low and soaring house prices encouraged consumers to borrow at an unprecedented pace last year. The central bank in November raised interest rates for the first time in almost four years to 3.75 percent. The ITEM club criticized the bank then for raising borrowing costs prematurely.
The group's forecast for rates by the end of this year is above the median prediction of 4.5 percent in a Bloomberg survey of 31 economists on Friday.
U.K. economic growth will accelerate to 3 percent this year and maintain that rate in 2005, the ITEM club said, enabling Chancellor of the Exchequer Gordon Brown to meet the lower end of his growth forecasts for both years.
`More Robust'
``With a stronger global economic picture, a private sector that is showing distinct signs of recovery and with demand holding up from the public sector, we now have a U.K. economy in a more robust state than for the last couple of years,'' Peter Spencer, chief economic adviser to the ITEM Club, said.
The economy grew at an annual rate of 2.1 percent in the second and third quarters, the fastest pace since the first half of 2001, government figures show. The median forecast of 31 economists surveyed by Bloomberg is for growth of 2.3 percent in the fourth quarter.
The anticipated stronger growth won't push inflation above the Bank of England's 2 percent target, the ITEM club said. The group dismissed Governor Mervyn King's assertion that there's little room for expansion without fueling inflation. It said the output gap, which refers to the economy's capacity for further growth without boosting inflation, is about 1 1/2 percent.
U.K. inflation, which has remained below target for two years, slipped to 1.3 percent in November. The ITEM Club predicts price growth will accelerate to 1.6 percent this year and 1.7 percent the year after. |
