Consumer spending boost 'could trigger rate rise in February'

Domestic demand will drive the economy leading to the UK's first interest rate hike as early as February, according to a report out today.

The National Institute of Economic and Social Research (NIESR) has pencilled in a rate rise for the second month of 2016, a year earlier than the most pessimistic economists.

The Bank of England has left interest rates at historic 0.5% for more than six years, with most economists forecasting a rise will come well in next year, and some not forecasting a rise until February 2017.

But NIESR said today in its November report that UK households with their rising spending power in a low inflation environment will continue to boost domestic demand.

The report said consumer spending coupled with business investment will see inflation average 1.1% next year, compared to consumer price inflation currently at minus 0.1%, weighed by low oil and food prices.

Last month official data showed that UK economic growth slowed more than expected in the third quarter of the year to 0.5% from 0.7% in the previous quarter.

But NIESR said growing household incomes will see the economy rebound in the final quarter of the year.

It said: "Domestic demand will continue to be the main driver of growth this year and next as households take advantage of purchasing power improvements from the low inflationary environment and firms continue to invest."

It added this will lead to a likely rate hike in February, though it added this may be pushed back until the second quarter of 2016, and will then rise slowly to 2% by 2018.

NIESR also expects the world economy to grow at a robust level over the next two years at 3% this year and 3.4% in 2016, pared back marginally from 3.5% from its August report. Though it added persistent low interest rates and China's slowing economy were risks to growth.

It said measures by central banks around the world to boost spending will encourage growth, which will spread to emerging markets by 2017.

This contrasts with the International Monetary Fund who last month warned that the risks of a global financial crash had increased as the slowdown in China and potential US rate rises threaten the stability of debt-laden emerging economies.

In its latest World Economic Outlook, the IMF predicted world growth of 3.1% this year, from its previous projection of 3.3%.