IMMIGRATION into Britain has eased pressure on the labour market and allowed interest rates to be lower than they would have been, according to a new analysis.

The Ernst & Young Item club, which uses the Treasury’s model of the economy, suggests that the increase in net migration into Britain in recent years has reduced interest rates by half a percentage point and that the effect is likely to grow to one percentage point.

This net migration, which reached 223,000 in 2004 — the latest year for which figures are available — has allowed employers to fill jobs more easily. A recent government analysis concluded it had not taken jobs from British workers. Now the Item club suggests the effects have been beneficial.

“We are on the crest of a new immigration wave,” said Peter Spencer, chief economic adviser to the Ernst & Young Item club. “The steady flow from the most recent (EU) accession countries to the UK has proved remarkably positive, keeping interest rates half a point lower than they would otherwise have been. This influx has benefited many regions across the UK.”

While the Item analysis concedes that the recent inflow has been accompanied by a rise in unemployment, it says immigration still produces “a very favourable cost-benefit ratio”.

This, however, is disputed by organisations such as Migration Watch. It says that while there may be some economic benefits from immigration, these are outweighed by negative social and economic effects.

The Item club’s forecast is that growth in Britain will gradually pick up, from 2.3% this year to 2.6% next year and 3% in 2008. But, after last week’s announcement of a surprise drop in inflation to 1.8%, it sees long periods ahead when inflation will be below the Bank of England’s 2% target.

Its generally upbeat message on growth is backed up by the latest KPMG Middle Market survey of firms with a turnover of between £5m and £500m.

The two previous quarterly surveys had been downbeat but the latest, to be published tomorrow, shows that 50% of the firms surveyed think prospects for the sector over the next 12 months are “good” or “very good”, compared with 26% in the previous two surveys.

Optimism about their own businesses was even higher, with 68% upbeat. Mel Egglenton at KPMG said: “After two quarters of doom and gloom, it’s a relief to be reporting some good numbers.”

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