Another rise in interest rates by the autumn is set to put the brakes on the economy next year, as still higher borrowing costs tighten the Bank of England’s squeeze on consumer spending power, the CBI forecast yesterday.

One further rise in interest rates, to 5.75 per cent, over the next few months is now more than likely, although not yet a foregone conclusion, the CBI said in its latest quarterly forecasts.

The employers’ group said that the expected fifth increase in base rates since last autumn was likely to see GDP growth slow from a projected 2.9 per cent this year to a more muted 2.4 per cent in 2008 – 0.2 points below the CBI’s previous forecast – as dearer money reduced households’ disposable incomes.

The forecasts envisage that consumer spending will still rise by a robust 2.8 per cent this year, 0.2 percentage points above what the CBI anticipated in March. But they see spending growth easing off to only 2.1 per cent by next year.

Ian McCafferty, the CBI’s chief economic adviser, said that a further rise in base rates seemed probable as recent increases in oil prices, higher than expected import prices, and attempts by businesses to bolster profit margins had all added to inflationary pressures.

Despite its expectation of a weaker performance by the economy next year, the CBI’s assessment of prospects remained broadly upbeat.

It expects consumer price inflation to end 2007 at 2.2 per cent, a little higher than it previously thought, but that this will continue to abate, falling below the Bank’s 2 per cent target by the middle of next year.

The CBI is also forecasting continued strong growth internationally, with UK exports tipped to remain robust next year, aided by a slight depreciation of the pound. The CBI suggests that this could allow net trade to become a positive contributor to overall growth for the first time since 2005.

It also forecasts continuing small falls in unemployment. It sees business investment growing by 5.9 per cent this year, but by a weaker 3.7 per cent in 2008.

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