"The rate increase should not be seen as a tightening in policy, but instead as a modest withdrawal of some of the additional stimulus that was injected into the economy"
This will be the first policy rate increase in nearly eleven years. NIESR says "the rate increase should not be seen as a tightening in policy, but instead as a modest withdrawal of some of the additional stimulus that was injected into the economy after the 2016 EU referendum".
Its forecasts for GDP growth remain unrevised at 1.7% this year and 1.9% next year. According to NIESR's forecast, 2017 "will mark the trough for GDP growth".
It also predicts CPI inflation to peak at 3.0% in the last quarter of this year before easing back to the target rate of 2% in the final quarter of 2019.
In its forecast, the fiscal deficit is eliminated in 2022 and the debt-to-GDP ratio peaks in 2018/19.
Its forecast continues: "Developments in the labour market remain puzzling. The employment rate has risen to a record high of 74.9% in the three months to May 2017, the unemployment rate has dropped to 4.5%, the lowest since 1975, yet wage growth remains muted. Average weekly earnings adjusted for inflation dropped by 0.7% in the three months to May compared to the same period last year.
"Our forecasts are conditioned on a return to meaningful productivity growth from 2018 onwards. Failure of such growth to materialise presents a downside risk to our forecast."
