Another interest rate rise 'on way'

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The CBI's quarterly economic forecast predicts a quarter point increase to 5.75% this autumn, followed by a cut to 5.5% by the end of 2008.

Higher borrowing costs, including four rate rises from the Bank of England since last August, also prompted the CBI to cut its prediction for economic growth in 2008 to 2.4%, down 0.2% on its forecast in March.

As a result of the weaker growth, chief economic adviser Ian McCafferty said the Bank should have room to bring interest rates back down to 5.5% in the second half of 2008.

He added: "Despite the current speculation, we do not see the need for rates to hit the 6% mark."

The group said recent oil price rises, sharp increases in food costs, higher-than-expected import prices and the willingness of firms to rebuild profit margins made a rate rise "more likely than not" this autumn.

Despite the higher borrowing costs, the CBI said it still expected the UK economy to grow at 2.9% this year. Inflation will also end the year at 2.2% - slightly higher than forecast - before falling below its 2% target by mid 2008.

The CBI's forecast of weaker economic growth in 2008 reflects the squeeze on disposable incomes caused by higher borrowing costs. Business investment will grow by 5.9% in 2007, but then slow to 3.7% next year, it added.

The Bank of England recently indicated that one more rise in interest rates to 5.75% was likely to be needed in order to bring CPI inflation back to its 2% target, with most experts pencilling in the rise for July or August.

But Bank governor Mervyn King also told a business audience in Wales this week that "further action" on interest rates could be necessary if companies' pricing intentions remained strong and inflation expectations stayed high.