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Interest rates to rise in early 2015, says CBI

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
05/12/2014

Interest rates will rise during the first three months of 2015, earlier than previously forecast, according to the CBI.

Previous predictions said interest rates would remain low until the end of 2015.

However, the business lobby group expects rates to increase to 0.75 per cent from 0.5 per cent in the first quarter of the year thanks to higher GDP growth.

The CBI has upgraded its forecast for GDP growth as the recovery continues to take hold. It now expects growth of 3 per cent this year, up from a previous estimate of 2.7 per cent.

The economy grew by 0.8 per cent in the first quarter of 2014 and quarter-on-quarter GDP growth of 0.7 per cent is expected for the rest of this year and next.

However, despite encouraging economic signs, the CBI warned “political uncertainty remains a major risk to the recovery”.

It urged politicians to “stick with what’s working” and “tackle the UK’s long-term economic challenges”.

Among the measures the CBI is calling for are committing to eliminate the budget deficit, scrapping the immigration target and raising the tier 2 visa cap, ensuring big infrastructure decisions are taken with a long-term strategic view and avoiding damaging market interventions.

John Cridland, CBI Director-General, said: “The UK now has more stable economic foundations, and political risks must not jeopardise this.

“The recovery is advancing after a strong performance in the first quarter of 2014. Prospects are bright and we expect the recovery to broaden out this year, with greater support from business investment in particular.

“Businesses recognise the realities of election time but want all parties to ensure their policies make a positive difference. Politicians must be wary of the risk of headline-grabbing policies that weaken investment, opportunity and jobs.”

On housing, the CBI said that while housing transactions remain 29 per cent below their 2006 pre-crisis peak, they are picking up firmly.

It said London house prices are 25 per cent above their peak in 2008, but prices for the rest of the UK (excluding London) are still 2 per cent below their pre-recession high.

The group expects house price inflation to rise to 8.2 per cent this year, up from 3.6 per cent in 2013.

Cridland said: “We have to remain alert to the risks posed by unsustainable house price inflation.

“Housing has come back under the spotlight as annual house price inflation figures have reached double digits on some measures. While housing transactions are still running almost 30 per cent below their last peak in 2006, they are picking up steadily.

“Although London house prices have risen 25 per centabove the 2008 peak, this has in part been fuelled by foreign cash buyers. Outside London, prices remain around 2 per cent below peak figures with an even greater difference when you move outside the South East.”