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Last Updated: Monday, 22 January 2007, 00:49 GMT
UK economy 'to see strong growth'
Wage packet
The Club believe rates will rise if wages growth is not reined in
The UK economy is set for strong growth this year, driven by the booming financial services sector and rising business investment, a report has said.

The Ernst & Young ITEM Club, using the Treasury's own model of the economy, predicted growth of 2.9% in 2007.

But while the group said the economy was in "rude health", it said sticking to inflation targets was vital to rule out further interest rate rises.

Wage deals in particular must be kept in check to avoid more rate increases.

The report said the Bank of England "would not hesitate" to raise rates once more if there were signs that inflation was pushing up salaries.

Warning

Peter Spencer, ITEM's chief economic adviser, said the recent hike in interest rates was "a warning shot to wage negotiators that the 2% inflation target is non-negotiable".

"Settlements must be based on the target not the inflation headlines."

Average earnings increased by 4.1% in the year to November, despite a tightening labour market, the latest official figures show.

Target inflation - or the Consumer Prices Index - also rose to 3%, while the Retail Prices Index (RPI) jumped to 4.4%. RPI is often used as a basis for wage demands.

But the ITEM group forecast that inflation would fall back to the target rate of 2% this year, driven lower by falling energy prices and more people entering the workforce.

"By the spring... we should be seeing a decline in utility prices as the impact of lower raw material prices feeds through, coinciding with an increase in overall employment and an improvement in pay packets," it said.

The report comes days ahead of a key-note speech from Bank of England governor Mervyn King.




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