It suggests that the Bank of England does not need to raise interest rates to keep inflation under control, but warns that the poor state of the public finances may force Gordon Brown to raise taxes.

The new forecast, prepared using the Treasury’s model of the economy, follows a string of robust economic data last week and comes amid heightened fears of a hike in base rates. But a survey of analysts by Ideaglobal.com, a financial-research company, puts only a 20% probability on an August hike, and Item predicts weaker growth will remove the need for it.

“We’re saying that the second half of the year will not be nearly as strong as the first,” said Peter Spencer, Item’s chief economic adviser. “The rise in energy prices, by squeezing incomes, will end up being disinflationary, as it will in America. That is why the Bank will not need to raise rates.”

The forecast is for 2.5% growth this year and next, with consumer spending rising by 2% and 2.4% respectively, barely more than half its growth rate in recent years. It says Britain’s “seven years of plenty” driven by consumer spending will be followed by a weaker period because exports will not take up the slack.

“The UK economy is failing to exploit the current excellent global economic conditions and remains overexposed to any fault line that could develop,” said Spencer. France and Germany are doing better in export markets, he added.

Figures last week showed the budget deficit in the April-June quarter was up more than £3 billion on the corresponding period of last year. The report expresses scepticism about whether Brown will succeed in slowing public spending to under 2% a year from 2008.

Vince Cable, Liberal Democrat shadow chancellor, said: “This report will not be welcome summer reading for the chancellor. It highlights the weakness of household budgets and, with rising utility bills and unemployment and a likely increase in interest rates at the end of the year, the situation is only going to get worse.”

The Ideaglobal survey showed a median expectation among analysts that Brent crude oil will be $78.50 a barrel at the end of 2006, from Friday’s $74.

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