Rising inflation will force the Bank of England to increase rates as early as spring, the CBI predicts.
“The persistent strength of energy and commodity prices is a growing concern for inflation,” said CBI chief economic adviser Ian McCafferty.
“This makes it more likely that the Bank of England will need to start pulling back from record low interest rates earlier, rather than later, next year.”
Monetary stimulus will be withdrawn faster towards the second half of 2012, the CBI said. The business group expects rates to hit 2.75 per cent by the final quarter of 2012.
Despite a negative impact from January’s VAT rise, the CBI expects the economy to pick up in the second half of next year.
The picture of recovery is similar to forecasts made by the Office for Budget Responsibility (OBR) last month. The OBR anticipates a 2.1 per cent rise in GDP next year, rising to 2.6 per cent in 2012.
However, rates of growth should be greater during the third year of recovery, McCafferty said.
“Real incomes 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.
The economy will need to rebalance as government spending is reduced and consumer spending continues to be squeezed, the CBI said, and more emphasis will fall on business investment and net trade.
The group expects the government deficit to fall to £95bn in 2012-13.