CBI Raises UK 2010 Growth Forecast

The Confederation of British Industry raised its 2010 economic growth forecast and said the Bank of England may pause its bond-purchase plan in February as policy makers prepare to raise interest rates.

Gross domestic product will increase 1.2 percent next year after contracting 4.5 percent in 2009, the U.K.'s biggest business lobby said in a statement today. The CBI previously forecast expansion of 0.9 percent. The group predicts the bank will raise the benchmark interest rate from 0.5 percent in the second quarter to reach 2 percent by the end of the year.

Growth "is very subdued and fragile, particularly in the first half," Ian McCafferty, the CBI's chief economic adviser, told journalists at a briefing on Dec. 18. "We're probably going to see a pause" in the asset purchase program, he said.

Prime Minister Gordon Brown is trying to resuscitate the economy and rebuild voter support in time for an election which he must call by June. The forecasts show growth will resume again with a 0.5 percent GDP increase in the current quarter, marking an end to Britain's longest recession on record.

The recovery will be aided by companies rebuilding stocks to meet a rebound in world growth and as exporters benefit from a weaker pound, the CBI said. The pound is down 24 percent since the start of 2007 against a basket of trade-weighted currencies of the U.K.'s biggest trading partners, making British goods cheaper to buy abroad.

Export Outlook"Brighter global prospects and the sizeable depreciation that we've already seen in sterling will yield some benefit to growth in U.K. exports," McCafferty said. "We see growth of exports sluggish but positive in 2010, but accelerating quite hearteningly into 2011. That causes the current account to narrow quite sharply."

The pound may drop further against the dollar and the euro in the run-up to the election on concern no party will win a majority of seats in Parliament, the CBI said. The opposition Conservative party led the ruling Labour Party by 9 percentage points in an ICM Ltd. survey conducted between Dec. 11 and Dec. 13 found.

"Sterling faces significant problems of its own at this stage in terms of the size of the budget deficit and the need to fund that significantly,' McCafferty said. "The electoral uncertainty through until May will leave sterling on the back foot as a currency."

The CBI based its forecasts on the assumption that the central bank will raise the interest rate from the current record low, McCafferty said.

"We're still predicting that monetary policy will have a somewhat easy stance, but moving off the 0.5 back to some sort of slightly closer rate to normal I think is something that the bank will be considering over the course of the next year," McCafferty said.

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