UK to avoid double dip in 2011, but Base Rate will be going up

The UK economy will escape a "double dip" next year, but households face a tight squeeze on living standards, according to the Confederation of British Industry (CBI).

With a hike in VAT to 20% coming on 4 January and consumer confidence hitting record lows, ministers will be concerned the UK's fragile recovery could be derailed by renewed crises in the eurozone.

A sluggish property market and a drop in average house prices of 4% in 2011 completes the gloomy economic outlook, the paper writes.

The CBI said that the Bank of England will need to raise interest rates further and faster than previously thought, because of the impact of rising world commodity prices on inflation.

The bank rate, which currently stands at 0.5%, will be 0.75% by the spring of next year the CBI said, rising steadily to 1.25% this time next year and to 2.75% by the end of 2012.

Even at such levels, however, rates would be low by historical standards. The upward trend in rates will put additional pressure on the seven million mortgagors on variable rate deals linked to the Bank rate, adding hundreds of pounds a month to mortgage repayments.

In its latest economic forecast, the employers' organisation sees inflation peaking at 3.8% in the first quarter of 2011, on the consumer prices index (CPI) measure. On the retail prices index (RPI) measure, which also takes account of accommodation costs, inflation will hit 5%.

But "despite many risks to the outlook, and a forecast of particularly fragile growth at the beginning of 2011, the UK recovery is expected to be maintained", according to the CBI, which "still considers the risk of a double dip back into recession to be low".