NIESR Sees UK Growth Of 1.5% A Year; Bank Rate Rising To 2.0%

By David Robinson

     LONDON (MNI) - The National Institute of Economic and Social Research

forecasts that UK growth will run at 1.5% a year with Bank Rate rising from its

current 0.25% to 2.0%.

     The updated NIESR quarterly growth forecasts are pretty much in line with

the Bank of England's most recent ones. The BOE in its August Inflation Report

projections had growth holding at around 0.4% a quarter and both NIESR and the

BOE see the pace of growth settling at current levels.

     "We expect GDP growth of around 1.5 per cent per year over the next five

years, around 0.25 percentage points lower than our previous forecast," NIESR

said.

     The most recent official GDP data put growth at 0.4% on the quarter in the

third quarter and 1.5% on the year and with productivity growth low NIESR

predicts that this will become the new normal, with Bank Rate rising to 2.0% to

bring inflation sustainably back to the 2.0% target.

     "We expect the Bank of England to raise the policy rate by 25 basis points

this month and again every six months until Bank Rate reaches 2 per cent," NIESR

said.

     BOE Monetary Policy Committee newcomer Silvana Tenreyro was asked at her

recent confirmation hearing at the Treasury Select Committee if she had altered

her view, expressed at the start of the year, that GDP would expand by 1.5%. 

     "Actually, economic growth in the past year has been 1.5%, so that has been

spot on," she said.

     Where NIESR's view does diverge from current market perceptions is that it

sees Bank Rate reaching 2.0% whereas sterling overnight interest rate curves

imply Bank Rate will only rise to a touch over 1.25% over five years.

     The MPC's current guidance is that it will start unwinding quantitative

easing once Bank Rate reaches 2.0%, with the NIESR forecast bringing this level

into sight.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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