The Bank of England should hold interest rates at 0.5% and consider pumping more money into the British economy to ensure a stable recovery, a leading business group said.
The message from the British Chambers of Commerce (BCC) came as it raised its GDP growth forecasts to 1.7% for 2010, higher than predictions of 1.3% in June, though it warned the pace of recovery would slow sharply as fiscal-tightening measures took hold.
Despite its caution, the BCC backed Chancellor George Osborne's belt-tightening Budget, and also raised its hopes for GDP growth in 2011, from 2% to 2.2%.
BCC chief economist David Kern said: "If successful, the forceful deficit-cutting strategy announced in the emergency budget would put the UK on a path of sustainable and affordable recovery, and could help create a leaner and fitter economy."
But he warned the scale of the austerity measures could increase dangers of a double-dip recession and a clear growth strategy from the Bank of England was necessary.
The bank has held interest rates at an all-time low of 0.5% since March 2009 and has pumped £200 billion into its quantitative easing (QE) programme, in a bid to stimulate growth in the economy.
Mr Kern urged the bank's monetary policy committee (MPC) to hold its nerve and not bow to pressures to lower levels of inflation, which at 3.1% is well above the 2% target.
He said: "Threats of a setback to growth remain more serious than risks of a surge in inflation.
"Given the balance of risks facing the economy, we urge the MPC to keep interest rates at 0.5% until the second quarter of 2011 at the earliest, and to consider further increases in the quantitative easing programme if the economy weakens."
The BCC also said it expected unemployment to increase over the next 18 months, from 2.46 million to 2.65 million in the first half of 2012.