Interest rates 'to stay low for years'

Published 12th Oct 2009

CEBR also predicts:
• £100bn in tax rises and spending cuts
• Pound falling below parity with the euro
• Another £75bn of quantitative easing


Interest rates will stay at rock bottom in the years to come as the government tackles the UK's wounded economy, a report out today predicted.

The cost of borrowing is to remain at its record low of 0.5% until at least 2011 and remain below 2% until 2014, according to a study by the Centre for Economics and Business Research (CEBR).

A weaker pound – slumping to just $1.40 and possibly falling below parity with the euro – is also expected.

The CEBR predicts the next government will have to generate around £100bn through tax rises and spending cuts to deal with the country's deficit.

Political parties are already vying to explain how they plan to address the dire public finances after next year's general election.

The report forecasts that if the Conservatives win power it will mean £20bn in extra taxes and an £80bn reduction in spending.

A future government will have to wrestle the budget deficit down to £50bn by the 2014-15 financial year, a tough challenge, as the CEBR also warns that the deficit will be £143bn in that year without action.

The report also predicts the Bank of England will increase its quantitative easing (QE) programme – essentially printing money – by another £75bn.

This month the Bank voted to not to increase its programme to boost the money supply from its current £175bn.

But further QE is expected, not least because governor Mervyn King and two other committee members have already argued for a £75bn boost to the scheme.

CEBR chief executive, Douglas McWilliams, said: "We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward.

"Our analysis says that this ought to work. If it does so, we are likely to see a major re-rating of equities and property which in turn should stimulate economic growth after a lag."

The CEBR expects UK economic growth between 2009 and 2014 to average 1.4%, although it predicts the hefty budget cuts to get the country's finances back on track will cause the figures to dip in 2011 and 2012.

After that, weak sterling and low interest rates are predicted to encourage investment, halting the trend for savings and boosting exports.

Source: ' Interest rates 'to stay low for years' '

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