Business leaders forecast earlier than expected interest rate rise

The CBI expects the Bank of England to raise interest rates early next year
The CBI expects the Bank of England to raise interest rates early next year
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INTEREST rates will rise ahead of the General Election amid concerns about house price inflation, according to new forecasts from a leading business group.

The employers’ organisation the CBI also warns the next Government will need to stick to plans to cut public spending to keep the economic recovery on track.

Recent Halifax data suggests house prices in Yorkshire have risen by 7.4 per cent in the last year while in London they have leapt by 15.5 per cent.

Critics of the Government have argued its Help to Buy scheme does not do enough to encourage the building of new homes and adds to the risk of a housing bubble.

Chancellor George Osborne has given the Bank of England’s Financial Policy Committee the role of reviewing the impact of Help to Buy.

CBI director-general John Cridland said: “We have to remain alert to the risks posed by unsustainable house price inflation, and the (Bank of England) Financial Policy Committee is poised to act when necessary,” he said.

“Housing has come back under the spotlight as annual house price inflation figures have reached double digits on some measures.

“While housing transactions are still running almost 30 per cent below their last peak in 2006, they are picking up steadily.”

Although London house prices have risen 25 per cent above the 2008 peak, this has in part been fuelled by foreign cash buyers.

“Outside London, prices remain around two per cent below peak figures with an even greater difference when you move outside the South East,” he said.

The CBI previously predicted that the Bank would have to start raising rates in the third quarter of next year but has now brought that forward to the first quarter.

Mr Cridland declined to say whether the Government’s Help to Buy scheme - which offers guarantees so that people without large deposits can get mortgages - should be wound down.

But he suggested the initiative was only having a marginal impact on the market, with the overwhelming majority of purchases in which it is used taking place outside London.

He added that it was crucial for governments to focus on increasing housing supply.

The CBI’s assessment upgrades its growth forecast for 2014 from 2.4 to three per cent and from 2.5 to 2.7 per cent next year.

But it says political uncertainty remains a “major risk to the recovery” and parties needed to show they would “stick with what is working” after the election.

“That means the new government, of whatever colour, keeping the deficit reduction strategy on track,” chief policy director Katja Hall said.

“It must also tackle the UK’s economic challenges and not duck the tough decisions, such as reforming public services.

“Political positioning must not be allowed to stifle investment, whether it’s an unrealistic immigration target, unjustified interventions into specific markets, flirting with leaving the European Union, delaying vital long-term infrastructure projects or restricting labour market flexibility.

“Pre-election pledges should not deter overseas and home-grown investors and entrepreneurs, nor limit a future government’s ability to deliver prosperity in the UK.”

Ms Hall said the next government needed to commit to implementing the conclusions of the Davies Commission on how to increase aviation capacity.