Prevarication and inaction by the Bank of England over controlling consumer spending will cause an economic downturn during the next year, a report from Ernst & Young ITEM Club said today. It said continued windfall-fuelled spending and low, fixed interest rate mortgages had offset the effects of interest rate rises and pushed up the British pound.
"Any interest rate rise by the Bank of England is now too late to quell the consumer," ITEM said. Three months ago it urged to bank to raise rates one more time to guide the economy to a "soft landing".
The bank's key repo rate has been held at 7.25 per cent since last November.
In the latest report, ITEM's economic adviser Mr Peter Spencer said: "With the Chancellor refusing to do anything to upset the consumer and a monetary policy blunted by the fall in long-term borrowing rates, we now have a rudderless economy."
ITEM said manufacturers had battled against the strong pound for as long as possible but would have to start cutting jobs soon.
These job losses, combined with the strength of sterling, would eventually dampen consumer spending and prove to be the only brake on the housing market.
ITEM's forecast gross domestic product growth would hit a trough of 1.5 per cent in 1999 before recovering to 2.2 per cent in 2000. GDP grew by 3.1 per cent in 1997.
It predicted inflation would fall to 2.5 per cent by the end of next year as interest rates fall.
Unemployment would climb to 1.5 million next year and 1.86 million by 2002, it said.
