This week's expected move by the Bank of England to raise interest rates to five per cent will, along with a slowdown in the US economy, cut UK economic growth to 2.3 per cent in 2007, a report has warned.
The latest economic outlook from Oxford Economic Forecasting (OEF) claims that Thursday's predicted quarter per cent rise, combined with falling demand for exports in the wake of slowing US growth, is likely to place downward pressure on business investment and consumer spending.
Analysts are widely predicting that the monetary policy committee (MPC) will raise interest rates to five per cent for the first time since August 2001 when they meet for their November session, in order to control rising inflation.
Global Insight chief economist Howard Archer warned last week that a 25 basis points rise in the cost of borrowing looked like a "stone cold certainty" amid inflationary fears, buoyant house prices and Bank of England concerns that pay settlements could move "markedly higher" in next year's wage rounds.
Releasing the OEF's assessment of likely economic growth in 2007 in the wake of a rate hike, the organisation's managing director, Adrian Cooper, said: "We have got used in recent years to interest rates being below five per cent, a factor that has encouraged households to take on record levels of debt."
"But with the threat of interest rates now rising higher than five per cent, growth looks set to slow in 2007 as households reassess their financial positions."
However, the OEF stressed that while economic growth, which currently stands at 2.6 per cent, was likely to slow over the coming year, such a reduction would subdue inflationary pressures and could see inflation falling below the Bank of England's two per cent target by the middle of 2007.
As a result, the MPC would have the capacity to cut rates during the second half of next year, which would subsequently prompt a pick up in economic growth in 2008 and 2009, the OEF predicted.
"Ultimately, we are not forecasting economic meltdown with interest rates at five per cent, merely weaker growth than perhaps there needs to be," added Mr Cooper.
"If our projections prove to be accurate, talk will shift early next year from further rate rises to rate cuts."