UK interest rates will remain at their historic low of 0.5 per cent until 2014, according to new predictions.
The forecasts, compiled by the Ernst & Young ITEM Club, suggest that the Bank of England will be forced to keep rates down for an extended period in order to combat anaemic growth levels.
Professor Peter Spencer, of the ITEM Club, said he believes UK growth “will struggle to reach 1 per cent this year.”
If the government introduces its full range of fiscal tightening measures, Mr Spencer expects that rates will have to remain low to stimulate growth and avoid deflation. He said: “A base rate of 0.5 per cent will begin to look like the new normal.”
The report warns that inflation will remain above the Bank’s target until the end of next year, as it is pushed up by the VAT increase and rising energy prices.
But the ITEM Club believes inflation will then fall sharply as “spare capacity bears down on pricing decisions and wage bargaining.”
The new Office of Budget Responsibility says it expects to see base rates rise during 2011.
