Bank must not 'squeeze economy'

The club believes interest rates will move up to 6% and stop there

The Bank of England's monetary policy committee (MPC) faces a balancing act, an influential forecast group says.

The Ernst & Young Item Club says the strong housing market must be closely watched, but the MPC must not rush into "damaging" interest rate rises.

It is predicting strong GDP growth of 2.9% in 2007 and 2.5% for 2008, and expects interest rates to rise further.

But it warns the MPC must be forceful, but not "squeeze the economy too hard" so that it jeopardizes exports.

'Acted forcefully'

The Item Club is an economic forecasting group which uses Treasury data and economic models in its research.

The MPC needs to rebalance the economy and cool the housing and financial markets, without jeopardizing exports Peter Spencer

Item chief economist Peter Spencer says: "Everyone is getting worried about monetary growth and interest rates.

"But the economy is not going to take a tumble, particularly with the global picture so firm.

"The Bank has acted forcefully, but it now needs to be careful not to squeeze the UK economy too hard.

"The MPC needs to rebalance the economy and cool the housing and financial markets, without jeopardizing exports."

The club expects interest rates to move up to 6% and then stabilise, which, it says, should be enough to halt the excesses in the housing market.

It also says that gas and electricity are now bringing down CPI inflation, which is likely to fall back towards the 2% target this autumn, giving the Bank breathing space.