The Bank of England will be able to drop UK interest rates to 4.5% by early next year, according to the Confederation of British Industry (CBI).
Due to the slowing economy and positive long term inflation expectations, the CBI says interest rates will be cut in Q2 and Q4 this year, with a further reduction early next year.
The CBI has downgraded its 2008 UK growth outlook, lowering expansion from 1.8% to 0.2%.
It says the UK economy faces a “bumpier ride” in the next two years, due to continued credit market troubles, rising commodity prices and weak domestic and global demand.
The industry body has also downgraded 2009 GDP growth to 1.7%, below the Chancellor’s “more optimistic” 2.25% to 2.75% Budget forecast.
While the CBI expects long term inflation to remain manageable, it says CPI will peak at 3.2% in Q3 this year, up from the previous 2.7% forecast.
CBI director-general Richard Lambert says after two years of strong growth the UK now faces “uncertain times”.
"We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth,” he says.
"Outside the financial and property sectors the overall mood of business is, however, nothing like as gloomy as you might guess from reading today's headlines.
“While there are signs of a high street slowdown and some firms say it's getting harder to raise bank finance, around the country many still report quite positive conditions."
Lambert says it is important to keep perspective amid the current climate.
“Although painful, write-offs by British banks represent a tiny fraction of their capital. After a few good years, the UK corporate balance sheet is in good shape,” he says.
“Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery."
To comment on this story, contact:
0207 484 9793
Caring for children and elderly relatives
Similar to June 2007
Square Mile’s series of informal interviews
Fine reduced to £60,000
Two roles created