Interest rates could stay low for years Economists predict rock-bottom rates until 2014

12 October 2009

The Bank of England base rate will stay at 0.5% until at least 2011, and will not reach 2% until 2014 according to an economic forecast from the Centre for Economics and Business Research (CEBR).

This could have a significant impact on UK consumers, affecting savings rates and the cost of mortgages.

CEBR’s report also predicts the pound will weaken further, falling to just $1.40 and possibly sinking below parity with the euro. It is based on the assumption that the next government will need to generate around £100bn of savings across a single parliament, if the country’s budget deficit is to come under control.

Tax rises, spending cuts

CEBR suggests that, if the Conservatives win the next general election, £20bn of these savings will be achieved through tax rises. The remaining £80bn will come from spending cuts.

CEBR’s forecasts assume that any incoming government will need to get the UK’s budget deficit down to £50bn by the financial year 2014/15.

If no fiscal action is taken, the organisation predicts, the gap in the public finances will swell to £143bn in that year.

A return to economic growth

CEBR also expects the Bank of England to increase its quantitative easing programme by a further £75bn, keeping the base rate at its current low level until at least 2011. It predicts this will help pull the country out of recession, with economic growth averaging 1.4% between 2009 and 2014.

CEBR’s report suggests rates will stay below 2% all the way up until 2014, when it expects stronger economic growth of 2.3% to return to the UK.

Douglas McWilliams, chief executive at CEBR and one of the report’s authors, 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.’

Impact on savers and borrowers

Which? money editor James Daley commented: ‘If the CEBR’s forecast turns out to be accurate, UK consumers could be in for a prolonged period of low mortgage rates. No doubt many homeowners and potential buyers would benefit in the kind of economic environment this report predicts.

‘However, the impact of long-term, low rates on savers could be severe. Those trying to build up a nest egg and people who rely on their savings for an income have already been hit hard by diminishing returns – and it’s hard to think they might face a further five years of near rock-bottom rates. If you’ve already been affected by falling savings rates, it pays to ensure you’re getting a competitive rate on the cash you have put by.’

To find out whether your nest egg could be growing that bit faster, make sure you check our independently reviewed Which? Best Buy savings accounts.

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