Record oil prices and rising interest rates today led the CBI to slash its forecasts for UK economic growth in 2005.

The business lobby group predicted a slowdown in consumer spending and said weaker global demand meant the Bank of England should not raise rates above 5.25%.

The UK economy was previously set to grow by 3% next year, but the CBI today downgraded its forecast to 2.8%.

Responding to the new data, CBI director-general Digby Jones said the Bank of England "must not overdo the rate rise medicine".

He said: "After five increases since November this forecast suggests that, combined with the impact on demand of recent oil price rises, the prescription so far may be almost enough to do the trick."

But the disappointing outlook for 2005 was countered by news that GDP growth in 2004 was set to be higher than previously thought.

The Government was likely to spend more money over the coming months, while changes to official data meant economic growth in 2004 should be 3.4%, compared with a previous forecast of 3.2%.

The decision to change the economic growth outlook in 2005 was sparked by oil prices moving within touching distance of 50 US dollars amid fears of disruptions to supply, especially in the Middle East and Russia.

Although the CBI expected oil prices to slip back to an average of 36.6 US dollars this year, this was still higher than previous expectations of 33.3 US dollars.

Thursday August 26, 2004