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Rising inflation will lead to higher interest rates, warns CBI


The Confederation of British Industry (CBI) is warning that rising inflation will lead to higher interest rates in the spring.


Predicting that inflation will hit 3.8% in the first three months of next year, the employers’ body said it expects the Bank of England will start to raise interest rates in the second quarter of 2011.


According to the CBI’s latest forecasts, the Bank will increase rates by 0.25 percentage points each quarter before the pace accelerates with rises of 0.5 points by mid-2012.


It is forecasting that interest rates will have reached 2.75% by the end of 2012.


The business group has also downgraded its quarterly growth forecast for the first three months of 2011 from 0.3% to 0.2%.


Ian McCafferty, chief economic adviser at the CBI, said: ‘What is striking is how little we see growth accelerating in 2012. Typically, by the third year of a recovery, growth would be more robust than we expect for either 2011 or 2012.


‘Growth prospects for consumer spending look pretty subdued over the next couple of years. Real take-home pay will be hit further next year; unemployment is not expected to fall very quickly in 2012, and households will most likely face higher mortgage interest rates,’ he added.