KEY POINTS:
The British economy will grow this year at the fastest pace since 2004, powered by consumer spending and business investment, a research group said.
The economy will expand 2.9 per cent in 2007, up from 2.7 per cent last year, the Ernst & Young ITEM Club said. The group, led by former Treasury economist Peter Spencer, uses the same forecasting model as the Government.
Surveys show gains in house prices and services accelerated toward the end of last year, supporting growth in Europe's second-biggest economy.
Faster expansion and inflation at its highest in a decade led the Bank of England this month to raise the benchmark interest rate for the third time since August, and investors are now speculating on another increase.
"The UK economy enters the New Year in rude health," the ITEM Club said. "The Monetary Policy Committee will not hesitate to raise interest rates again if there are more definitive signs of headline inflation pushing up wages."
Two Bank of England policy makers, Andrew Sentance and Timothy Besley, said last week that inflation, which has exceeded the 2 per cent target for eight months, may be reflected in wage demands.
Inflation will average 2.5 per cent this year, up from 2.3 per cent in 2006, the ITEM Club said.
The consumer price index, which reached 3 per cent in December, will return to the Bank of England's 2 per cent target by the end of this year, the forecast showed.
Consumer spending will expand by 2.9 per cent this year and business investment by 6.5 per cent, the fastest for each since 2004, the forecaster said.
Growth in services, accounting for about three-quarters of the economy, reached the fastest pace since June 1997 last month, a survey of purchasing managers by the Chartered Institute of Purchasing and Supply showed.
House-price inflation reached 10.5 per cent, the fastest pace since January 2005, Nationwide Building Society said.
- BLOOMBERG
