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Britain's economy will exceed expectations during 2007 before falling back to trend levels next year, according to the Confederation of British Industry (CBI).

Its latest quarterly economic forecast states that UK GDP growth will advance to 2.9 per cent in 2007, 0.2 per cent faster than was predicted in the CBI's December prediction.

It will then slip back to 2.6 per cent in 2008, when consumer price index (CPI) inflation will fall from its current 2.7 per cent level to 1.6 per cent, below chancellor Gordon Brown's target of two per cent.

The 2008 slowdown will be caused by slowing government public expenditure, where increased investments on the previous year will fall from 10.6 per cent this year to 2.9 per cent next year.

An expected fallback in government spending in 2008 remains key to the CBI's predictions. It claims that 2007's 10.9 per cent growth on the previous year's investment will

Meanwhile the Bank of England will raise interest rates once more during the next quarter to 5.5 per cent, before a long period of stability begins continuing throughout 2008, the CBI predicts.

"Underlying pressures remain as consumer demand remains healthy and companies are starting to push up prices to rebuild profit margins, which have been squeezed in recent years," CBI chief economic adviser Ian McCafferty said.

"I expect the Bank will guard against these pressures by maintaining a tight grip on monetary policy to keep inflation close to its target over a two-year horizon," he predicted.

"Business prefers lower rates but also appreciates even more that they peak at a relatively low level, and perhaps stay there, rather than continue to rise for lack of initial action."

The CBI predicts that manufacturing output will be boosted by higher-than-expected export and investment demand while wage growth and lower inflation will help consumer spending increase strongly.