NIESR forecasting three rate rises this year

| February 1, 2011 | 0 Comments

Influential think tank, the National Institute for Economic and Social Research (NIESR) is expecting the Bank of England to lift interest rates three times this year.

The London-based think tank made the comments after calling on Chancellor George Osborne to consider deferring the harsh spending cuts the Government has introduced.

Ray Barrell of the NIESR said there was an opportunity to delay some public spending cuts when the Chancellor presents his budget next month.

“It is likely we will have to face the political reality that some cuts are just not possible in the timetable set out by the government, but ministers should relax and rather than go looking for other things to cut, just let the process take a little longer,” he said.

The NIESR has also cut its growth forecast for the UK economy to 1.5% from 1.6% for this year.

Meanwhile, it is forecasting unemployment will rise to a rate of 8.7% in 2011 - up from 7.9% at the end of last year.

The Institute said interest rates will be raised to 1.25% by the end of the year, while it revised its 2011 inflation forecast to 3.8%, from 2.8%.

Many leading business groups have suggested that inflation could exceed the 4% mark this year – because of last month’s VAT hike.

Last month, official data revealed Consumer Price Inflation (CPI) rose to an annual rate of 3.7% in December, up from 3.3% in November.

The figure was much higher than the 3.4% analysts had expected and inflation has now been above its target of 2% for over a year.

Stubbornly high inflation led one of the Bank’s policymakers, Martin Weale (a former NIESR director) to vote for an interest rate rise at last month’s rate-setting meeting.

He joined fellow policy member, Andrew Sentance, who has voted for a rate rise at the last seven meetings.

Last month, figures revealed the economy contracted 0.5% in the final three months of 2010 - far worse than expected.

The figures raised fears of a double dip recession since the Government’s spending cuts are likely to hamper growth in the first half of 2011.

However, the figures have presented the Bank of England with a dilemma as it comes under pressure to raise interest rates to combat stubbornly high inflation.

However, the central bank will be reluctant at this stage to lift interest rates when the recovery is losing momentum.

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