Interest rates to hit 2.75% by 2012 - CBI

The CBI projects interest rates could hit 1.25% by the end of 2011, rising to 2.75% by Q4 2012 with inflation forcing the BoE to raise rates from their historic low in the Spring.

Private sector employer trade body, the Confederation of British Industry expects inflation to stay "stubbornly high" this year, partly due to the impact of higher VAT but also due to pressure from rising energy and commodity prices.However, it continues to predict, that the UK economy will grow in 2011 but has downgraded its GDP forecast from +2% to +1.8%.

The CBI said the UK is on the road to recovery, with growth accelerating in 2012, and maintains the risk of a double dip into recession is low.

John Cridland, CBI director-general, said: "With household spending under some considerable strain, we will be looking to business investment and exports to help deliver economic growth over the coming two years."While this growth will still be lower than the long-term average and unemployment will continue to creep up, job numbers will also increase as the recovery picks up," he said.

Ian McCafferty, CBI chief economic adviser, observed that growth is far weaker than we would normally expect for the second and third year of an economic recovery.

"Persistently high levels of inflation, caused by rising energy, commodity prices and the VAT increase, are also a concern. This makes it more likely that the Bank of England will need to start putting up interest rates from their record low level from the second quarter of this year."The economist said he expects unemployment to hit 2.71m by the end of 2011 but drop slightly to 2.64m by Q4 2012.