Interest rates ‘to stay at 0.5% until middle of next year’

Published: Monday 28th September 2015 by The News Editor

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A slowing world economy will force the Bank of England to keep interest rates on hold until the middle of next year, a report has said.

The Centre for Economics and Business Research (Cebr) said it expects rates to remain at their historic 0.5% lows until next summer before a hike by the Bank’s Monetary Policy Committee.

Previously the forecaster had said the Bank would raise rates in February, but plunging markets in China that have sent shockwaves around the world have caused it to push back this date.

The Cebr expects the UK economy to grow by 2.5% this year, but see this slow to 2% in 2016 and then average just 1.7% over the years 2017 to 2020.

By contrast, independent Government watchdog the Office for Budget Responsibility expects the UK economy to grow at 2.4% this year, and remain above 2% over the following period.

The new report said: “The global economic slowdown, driven by substantial weakness in emerging markets – most notably China – is holding back export prospects and curbing business investment.”

It added: “If the world economy continues to falter, then these weights on growth will become even bigger.”

The forecasting group said the consumer price index measure of inflation is expected to stand below 2% until 2017, giving the Bank room for manoeuvre to keep rates on hold.

A number of economists have expressed concerns about the sustainability of the UK’s recovery because it is driven by consumer spending, rather than selling goods and services abroad.

The Cebr said: “Household spending, not trade or investment, will account for the clear majority of the growth seen over the next five years.

“Net trade will act as a drag on growth over this timeframe as the UK continues to import far more than it exports.”

The body said the UK’s current account deficit – a measure of the country’s trading position with the rest of the world – is expected to average “an enormous” £77 billion per annum over the period 2015-2020.

It said this reflects “sluggish export growth as well as poor returns on overseas investments as the global economy stumbles”.

Cebr head of macroeconomics Scott Corfe said: “It’s clear that the global economy has deteriorated significantly over the past few months and there are significant downside risks to the UK’s own prospects.”

He said he expected inflation to remain below the Bank’s central target of 2% until 2017.

Mr Corfe forecast an interest rate rise in May or August to coincide with the Bank’s Inflation Reports released in these months.

He added: “Even when the Bank of England does raise rates, we expect the pace of rate rises to be very gradual.

“Even by 2020, we expect the Bank rate to stand at just 2% – what Cebr believes is the ‘new normal’ for interest rates.”

Published: Monday 28th September 2015 by The News Editor

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