UK economy 'to see solid growth'

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The UK economy will perform better than previously thought in 2007, the CBI has said, although it thinks interest rates will rise again soon.

The employers body is predicting growth of 2.9% in 2007, ahead of its previous 2.7% forecast, with the economy being supported by strong consumer spending.

The CBI expects the Bank of England to keep a "tight grip" on monetary policy despite an expected fall in inflation.

It expects rates to rise soon to 5.5% and remain there throughout 2008.

"The economy will enjoy better than expected growth this year as consumers continue to spend and businesses invest in their companies," said Ian McCafferty, the CBI's chief economic adviser.

"Our economic forecast shows the economy is in good shape at the moment with above-average growth this year and a good outlook for the year after."

Rates peak?

In his pre-Budget report in December, Chancellor Gordon Brown forecast growth this year of between 2.75% and 3.25%.

But the CBI added that it expected the economy to slow in 2008, with GDP growth easing to 2.6% amid tighter control over public spending.

The CBI believes consumer price inflation will gradually ease from its current level of 2.7%, dropping as low as 1.6% next year.

Although it sees the threat from higher energy prices easing, it expects "underlying" inflationary pressures to remain a factor due to strong consumer demand and companies' desire to raise their prices.

As a result, it expects the Bank of England not to reduce rates at all next year after putting them up another quarter point to 5.5% within the next couple of months.

"Business prefers lower rates but also appreciates even more that they peak at a relatively low level, and perhaps stay there, rather than continue to rise for lack of initial action," Mr McCafferty added.