Rates hike 'will cut 2007 growth'

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This week's expected UK interest rates rise - along with a slowdown in the US economy - will cut economic growth in the UK to 2.3% in 2007, a report warns.

Oxford Economic Forecasting (OEF) said that its downbeat prediction was based on anticipated weaker demand for exports and more reluctance to spend.

Almost all analysts say that a rates hike to 5% is inevitable when the Bank of England meets on Thursday.

The move would be part of an effort to reduce inflation.

Demand drop

"We have got used, in recent years, to interest rates being below 5%, a factor that has encouraged households to take on record levels of debt," said OEF managing director Adrian Cooper.

A 0.25 points hike in rates to 5% looks virtually unstoppable on Thursday Philip Shaw Analyst, Investec Securities

"But with the threat of interest rates now rising higher than 5%, growth looks set to slow in 2007 as households reassess their financial position."

He added that if the slowdown in the US economy translated into less demand for UK goods then business investment was also likely to fall.

Current economic growth in the UK is 2.6%.

The fall to 2.3% would keep inflation subdued, OEF said, which it predicted could lead to the bank's Monetary Policy Committee (MPC) cutting interest rates again in the second half of 2007

Last week, Bank of England governor Mervyn King insisted that next week's widely-expected rise in UK interest rates is not a "done deal".

But few believe that the MPC will keep rates on hold.

"A 0.25 points hike in rates to 5% looks virtually unstoppable on Thursday. The real debate is where rates head beyond November," said Investec Securities analyst Philip Shaw,

He said he still saw rates going no higher than 5% but added he was "less confident" about this than previously as inflation remained stubbornly above the government target of 2%.

"We cannot deny that there is a risk that rates rise to 5.25% and possibly beyond if the MPC does not like what it sees on the inflation front."