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Business leaders: Interest rate must rise soon

Business leaders have delivered a warning about overheating in the housing market, saying interest rates need to rise early next year.

In its regular assessment of UK plc's prospects, the Confederation of British Industry (CBI) raised its growth forecast for this year from 2.6% to 3%.

But it also highlighted concerns the recovery could be derailed by uncertainty around the General Election, urging politicians to push ahead with boosting the supply of homes and taking decisions on major infrastructure projects.

Director-General John Cridland said property values were expected to rise by 8.2% this year, and 5.1% next year.

"We have to remain alert to the risks posed by unsustainable house price inflation, and the Bank of England Financial Policy Committee is poised to act when necessary," he said.

"Housing has come back under the spotlight as annual house price inflation figures have reached double digits on some measures.

"While housing transactions are still running almost 30% below their last peak in 2006, they are picking up steadily."

Although London house prices have risen 25% above the peak, this has in part been fuelled by foreign cash buyers.

The CBI previously predicted the Bank would have to start raising rates in the third quarter of next year - but has now brought that forward to the first quarter.

The CBI's assessment said political uncertainty remained a "major risk to the recovery" and the major parties needed to show that they would "stick with what is working" after the election.

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