–NIESR: Bank of England Needs To Tighten Monetary Policy
–NIESR: Sees First Bank Rate Hike In Q3 2011
–NIESR: UK Should Use Money From Bank Stake Sales To Pay Off Debt

LONDON (MNI) – The National Institute for Economic and Social
Research has downgraded its forecast for UK output growth in 2011 to
1.4%, down from the 1.5% it had forecast in January, according to its
latest Economic Review report released Thursday.

The downgrade is due to the combined drag of government spending
cuts and the squeeze on household spending from higher taxes and
rising inflation, NIESR said.

As a result, the government will miss its target of balancing
the cyclically adjusted current budget by 2015-16 as
weaker-than-forecast growth results in lower-than-expected tax
revenues, NIESR claims.

“Growth this year will be constrained not just by the government’s
spending cuts but by the squeeze on households from higher taxes and
rising inflation,” NIESR said in its report.

“That will mean that… public sector net borrowing will fall only
to 3.6% of GDP in 2015- 16, rather than the 1.5% projected by the Office
for Budget Responsibility,” NIESR said.

NIESR’s 2011 growth forecast is lower than both the International
Monetary Fund’s and the official Office for Budget Responsibility’s
forecasts for a 1.75% increase in output in 2011.

NIESR: MONETARY POLICY ‘LOOSE’, BOE NEEDS TO TIGHTEN

In its report, NIESR also said that monetary policy is loose and
that the Bank of England needs to begin to raise rates.

“The current stance of monetary policy is loose and tightening does
need to commence, especially given the current rate of inflation,” NIESR
said.

The institute said that it did not expect Bank Rate to begin to
rise until Q3 2011, after which it expects Bank Rate to increase by
25bps each quarter until the end of its forecast horizon in Q4 2012.

NIESR forecasts that tight monetary policy will lead to a 4.5%
fall in house prices in 2011 then drop by an average of 1% per annum
over the subsequent four years.

NIESR: INFLATION TO RISE TO NEAR 5% IN 2011, THEN FALL

The report forecasts the rate of CPI inflation to rise
towards 5% second half of the year as the effect of rising oil prices
feeds through into consumer prices.

But it then expects CPI to fall throughout 2012 as the effect of
January’s VAT increase works its way out of the annual comparison. NIESR
has inflation at 1.9% in the final quarter of next year.

NIESR: UNEMPLOYMENT TO RISE THIS YEAR, FALL NEXT

NIESR also forecast that ILO unemployment will surge from its
current level of 7.6% to 8.6% by the end of 2011, before falling back in
subsequent years.

“We expect unemployment to rise this year due to a decline in
demand for employees, as employers raise their labour input through
hours worked rather than the number of their employees,” NIESR said.

UK SHOULD USE BANK SALE CASH TO PAY DOWN DEBT

In its report, NIESR also said that the UK Treasury should use any
windfalls from the future sale of nationalised banks to pay down the
UK’s national debt.

“At some point in the future the government will sell its equity
stakes in the nationalised banks. It would be wise to use such windfalls
to reduce government debt if we are to be fair to future generations and
prepare for the next crisis,” NIESR said.

Two major UK banks, RBS and Lloyds were bailed out in 2008, with
the government taking an 84% stake in RBS and 43% in Lloyds at a rough
cost of stg66 billion – or more than 5% of GDP.

There has been some speculation that Chancellor of the Exchequer
George Osborne could use the money raised to fund a fiscal giveaway
ahead of the general election, which has to be held by 2015.

–London Bureau; Tel: +442078627492; email: ukeditorial@marketnews.com

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