Wednesday 3 February 2016 4:10 am

Niesr: UK economy to gain momentum as inflation stays low and interest rate rises are delayed by EU referendum

Chris Papadopoullos was City A.M.'s economics reporter until February 2016.

Chris Papadopoullos was City A.M.'s economics reporter until February 2016.

The UK economy should pick up steam this year, with low inflation and a delay in interest rate hikes to create conditions for faster growth, a think tank has said today.

The economy should grow 2.3 per cent this year, up from 2.2 per cent in 2015, according to forecasts published today by the National Institute of Economic and Social Research (Niesr). It could then accelerate to 2.7 per cent next year as economic recoveries take hold abroad, lifting UK exports.

Inflation, the annual change in average prices, is forecast to be 0.3 per cent this year. Niesr said the outlook for inflation was softer due to continued commodity price falls. Low inflation will boost consumers, but will also delay interest rate rises from the Bank of England. Niesr does not believe inflation will reach its two per cent target until 2020.

An EU referendum in June could also play a role in delaying interest rate hikes, it said. The Bank of England will likely raise interest rates in the second half of the year, Niesr said.

"We have pushed back the point at which we think the Monetary Policy Committee is most likely to begin raising Bank Rate to the second half of 2016, based on recent communications by committee members and the timing of the UK’s impending referendum on membership of the European Union," Niesr said.

"However, there remain a number of factors which indicate that commencing with interest rate rises soon would not be inconsistent with meeting the MPC’s remit over the medium term."