The employers group said the Bank of England would begin to “normalize” monetary policy in the spring as inflation picks up.
It said that would be followed by a slightly faster stimulus withdrawal over the second half, taking the Bank rate from a record low of 0.5 percent to 2.75 percent by the fourth quarter of 2012.
A recent Reuters poll of economists forecast rates would not start to rise until the fourth quarter of next year and put rates at 2.00 percent by the fourth quarter of 2012.
“There’s increasing speculation that the BOE will need to respond to inflationary pressures but we don’t see a rate hike in the first half of next year as a likely scenario given our negative view on the euro zone and the potential impact on the UK,” said Lee Hardman, currency analyst at BTM UFJ.
The CBI downgraded its forecast for quarterly growth in the first three months of 2011 from 0.3 percent, saying rising unemployment, a new year VAT hike and higher-than-expected inflation would dent the fragile recovery, but said it expected the recovery to be maintained.
It also said it considered the risk of a double-dip recession to be low.
The CBI said growth would be knocked in the first quarter when consumer spending falls slightly in response to a rise in VAT. It forecast “fairly modest” growth of 0.4, 0.5 and 0.5 percent over the remaining quarters of 2011.
The group said the economy would expand by 2.4 percent over the year as a whole, which it said was subdued for this stage of a recovery.
“The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected, and somewhat faster than typical during the first year out of a recession. But we do not expect that rapid pace of growth to continue over the next two years of recovery,” said CBI Chief Economic Adviser, Ian McCafferty.
“The big early kicker to growth from the turn in the inventory cycle has already passed and we are now starting to feel the impact of lower government spending,” he said.
It also expected inflation through 2011 to be higher than previously forecast, a reflection of higher energy and commodity prices.