RECORD oil prices and rising interest rates has led the Confederation of British Industry (CBI) to cut its forecasts for UK economic growth for next year.

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 per cent. The UK economy was previously expected to grow by three per cent next year, but the CBI downgraded its forecast to 2.8 per cent.

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 next year was countered by news that GDP growth this year was expected 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 this year should be 3.4 per cent, compared with a previous forecast of 3.2 per cent.

In a separate announcement, the CBI said 32 per cent of manufacturers expected to increase output over the next three months compared with 13 per cent who expected it to retreat.

Orders rose to their highest level since February 1998 on the back of stronger domestic and overseas demand.

John Butler, HSBC economist, said the manufacturing data showed last month's fall in confidence was temporary and suggested the recovery remained intact.

He said: "This is a stronger than expected survey, contradicting the view that growth is starting to slow and raising sufficient question marks about the outlook for future inflation."