Rate rise 'could hit UK growth'

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UK economic growth could fall below 2% early next year if interest rates continue to rise, a report has warned.

The British Chambers of Commerce (BCC) said UK growth could decline if, as expected, the Bank of England raises rates to 5.5% in the coming months.

Bank policymakers announced a shock rise in interest rates to 5.25% from 5% in January, in a bid to curb inflation.

Although the Bank avoided a second quarter point rise this month, analysts are expecting a further increase.

The BCC said it still forecast that overall UK gross domestic product would be 2.6% in the current year.

But it said growth could slow to 1.9% in the first three months of 2008 if interest rates reach 5.5%, with overall growth next year slipping to 2.1%.

"We acknowledge that inflation is a serious problem, and we accept that the Monetary Policy Committee (MPC) may have to take further action," said BCC economic adviser David Kern.

"But monetary policy cannot affect the economy instantaneously. The MPC must allow time for the measures taken already to work, before raising rates further."