Business

UK interest rates to stay at record low 'until 2014'

Bank of England
Image caption The Bank of England lowered interest rates to 0.5% in March 2009

The Bank of England will have to keep interest rates at their record low of 0.5% until 2014, a leading economic forecaster has said.

The Ernst & Young Item Club said rates would need to be kept low to counter-balance the government's spending cuts.

"A base rate of 0.5% will begin to look like the new normal," Professor Peter Spencer from the Item Club said.

The Office for Budget Responsibility (OBR) has said that it expects rates to start to rise next year.

Interest rates have stood at 0.5% since March 2009.

"The new coalition's plans to cut the deficit are certainly ambitious," said Prof Spencer.

"On the assumption that the government is able to implement the overall reduction of £40bn set out in the Budget, we expect that UK growth will struggle to reach 1% this year but will gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment."

The Item Club believes the Consumer Prices Index (CPI) measure of inflation will stay above the Bank of England's 2% target over the next 18 months, helped by high energy prices and increases in VAT.

But it says inflation will then fall "well below 2% as these effects wear off and spare capacity bears down on pricing decisions and wage bargaining".

"To prevent CPI inflation moving below 1% it will be necessary keep the Bank base rate low at 0.5% for much longer than the OBR and the markets have anticipated," Item said.

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