THE CBI has warned of the risks of rising oil prices and financial market instability, despite growing consumer spending and the revival of exports.

The employers’ organisation’s quarterly report raised its forecast for economic growth, but insisted the outlook remained vulnerable. The CBI also called on the Bank of England’s Monetary Policy Committee not to adopt shock tactics on interest rates as this would add further economic uncertainty.

Strong consumer spending is driving the economy, fuelled by low unemployment, rising take home pay, willingness to borrow and a strong housing market. Household consumption is expected to grow by three per cent this year but slow to 2.6 per cent in 2005 as interest rates rise and households begin to reduce their debt.

Nigel Bourne, the CBI’s South East Regional Director, said: "The recovery has gained a good deal of momentum. With consumer spending rising more strongly than expected, the housing market picking up again and the world recovery on course, there is scope for solid economic growth in the UK over the next 18 months.

"However, at the same time, the outlook remains vulnerable to rising oil prices and potential financial market instability. Shock tactics on interest rates would add further uncertainty. The Bank of England should continue its gradualist approach in order to maintain a steady upswing."

The strength of the consumer sector and rising raw materials prices suggest the Bank of England will increase interest rates faster than previously expected over the course of 2004, to a peak of 5.25 per cent by early 2005.

After UK exports fell in 2002 and 2003, the strength of global demand is expected to drive faster export growth through 2004, with growth of 2.8 per cent forecast this year, and 5.5 per cent for 2005.