A leading think tank has brought forward its predictions for the timing of the first interest rate hike for 10 years from the second quarter of 2019 to the first quarter of next year.
The National Institute of Economic and Social Research is forecasting the UK economy will grow this year and next year with UK GDP expected to grow at 1.7 per cent in 2017 and 1.9 per cent in 2018 which will lead to an earlier than expected rise in interest rates in the spring of 2018.
It expects annual consumer price index inflation - currently at 2.6 per cent - to peak at 3 per cent in the last quarter of this year before easing back to the target rate of 2 per cent in the final quarter of 2019.
According to the institute: "Our forecast for CPI inflation however, is lower compared with that in our May review because the out turn for the second quarter was weaker than our forecast.
"Notwithstanding the downward revision to the inflation forecast, we have brought forward the timing of the Bank Rate hike from the second quarter of 2019 to the first quarter of next year.
"This rate increase should not be seen as a tightening in policy, but instead as a modest withdrawal of some of the additional stimulus that was injected into the economy after the 2016 EU referendum."
The economy expanded by 0.3 per cent in the second quarter of 2017 according to official statistics, in line with the Institute’s nowcast and slightly faster than the 0.2 per cent growth in the previous quarter.
The economy has slowed each year since 2014 and according to the Institute's forecast, 2017 will mark the trough for GDP growth. Thereafter, the think tank envisages a modest recovery that takes economic growth to a level that is close to potential.
The think tank expects inflation, as measured by the consumer price index,to increase further, from 2.7 per cent in the second quarter of 2017 to 3 per cent in the final quarter, before easing back to the target rate of 2 per cent in the final quarter of 2019.
The NIESR added: "Developments in the labour market remain puzzling. The employment rate has risen to a record high of 74.9 per cent in the three months to May 2017, the unemployment rate has dropped to 4.5 per cent, the lowest since 1975, yet wage growth remains muted.
"Average weekly earnings adjusted for inflation dropped by 0.7 per cent in the three months to May compared to the same period last year."
But it added: "Our forecasts are conditioned on a return to meaningful productivity growth from 2018 onwards. Failure of such growth to materialise presents a downside risk to our forecast."
Darius McDermott, managing director of Chelsea Financial Services, said: "The UK economy post-Brexit has been surprisingly robust with consumer spending holding up well in the third and fourth quarter of 2016 although there has been some slowing since then, despite the economy gaining some benefit from the weakness of sterling."
Agreeing with the NIESR he said: "Interest rates will be lifted from their 'emergency, emergency' level post Brexit from 0.25 per cent back to a simple 'emergency' level of 0.5 per cent."
He said there was an outside possibility of interest rates returning to 1 per cent by the end of 2018.
stephanie.hawthorne@ft.com
