Interest rates ‘to remain low for years’
THE Bank of England’s decision to hold interest rates for an 18th month in a row has triggered predictions that the base rate could remain below 1% for months to come.
The Monetary Policy Committee was not tempted to alter its stance after the rapid GDP growth seen in the UK economy in the second quarter and also maintained the £200bn ceiling on the quantitative easing programme.
Bank of England governor Mervyn King has previously warned that the recovery remains fragile and with the full effect of public sector cuts yet to feed through a growing number of economists are now forecasting a prolonged period of low interest rates.
Roger Bootle, economic adviser to Deloitte, said there were already signs that growth has started to slow and the housing market was “showing clearer signs of weakening”.
He said: “I continue to think that interest rate rises should be postponed and that, as inflation falls, the MPC should consider more seriously doing more quantitative easing to counteract the contractionary influence of the fiscal tightening. I think that interest rates could stay at 1% or below for several years yet.”
The minutes of recent MPC meetings suggest only one member, Andrew Sentance, has advocated raising the base rate while the July meeting did include discussion of the quantitative easing programme.
Andrew Palmer, CBI regional director for Yorkshire and the Humber, said: “The views within the MPC have become more divergent in recent months, with arguments in favour of both further easing and tightening of policy, reflecting concerns about the strength of the recovery and worries about inflation.
“After the strong gain in economic activity between March and June, growth is expected to be slower in the second half of this year, but the recovery continues to be supported by the current, exceptionally loose monetary policy.
“A move towards a gradual withdrawal of the monetary stimulus may be warranted in the coming months.”
A recent forecast from the Ernst & Young Item Club suggested interest rates could remain unchanged until 2014.
