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CBI Calls for Rate Rise

Following an upward-revision of its 2006 growth forecast for the economy, the Confederation of British Industry (CBI) have announced that they believe a further increase in the base interest rate is needed before year’s end in order to keep inflation under control.

The CBI is set up to look after its member’s interests, and has in the past been vehemently outspoken in times when the MPC has raised rates when they believed it was not the right course of action, so for it to be calling for a rate rise itself is noteworthy, and makes a rise look all the more likely.

In its forecast, the CBI revised their GDP growth prediction for 2006 to 2.7 per cent, up from their previous estimate of 2.4 per cent. This however is not the increase that will have an influence on interest rates, the figure to pay attention to is the consumer price index, which it has forecast to peak at 2.8 per cent in early 2007 if rates remain as they are.

This forecast, if borne out, would be bad news for the Monetary Policy Committee of the BoE, as it is their task to keep inflation of the consumer price index at the 2 per cent level – running at 2.8 per cent would be very close to the upper limit set of 3 per cent, at which they would be require to formally write to the chancellor to explain why the situation arose.

In order to control this inflation, the MPC will alter the base interest rates, increasing them will generally have the effect of lessening inflation, whilst reducing them will have the reverse effect.

There have been many signs of late that a rate rise will be necessary, and even though the rates were increase a quarter point only a couple of months ago, it is looking likely given the current economic data that another such rise will be put in place before then end of the year, which would take rates to five per cent.