Think-tank: No rate rise before 2016

Tim Wallace
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THE WORSENING economic outlook means interest rates will stay at rock-bottom levels until 2016 and quantitative easing (QE) will soar to £400bn, according to forecasts published today by the Centre for Economics and Business Research (CEBR).

The think-tank slashed its economic growth forecast for 2012 from 0.7 per cent to a contraction of 0.4 per cent, with a risk of a 1.1 per cent decline if the Eurozone crisis continues to intensify.

This recession will push unemployment up to around 3m by mid-2013, “as companies batten down the hatches for the long term and revise their medium term expectations of labour requirements”.

Inflation is set to fall to 1.7 per cent by the fourth quarter of 2012 and remain at around two per cent thereafter, the CEBR forecasts.

The think-tank believes lower inflation will allow the Bank of England to keep rates at historic lows and step up its QE programme from its current £275bn to a total of £400bn.

Indeed, even more QE could take place if gloomy conditions continue – the Cebr expects growth of 0.9 per cent in 2013 and one per cent a year from 2014 onwards.

Ernst and Young’s Item Club has also cut its growth forecasts to 0.2 per cent for this year, 1.8 per cent in 2013 and 2.8 per cent in 2014 due in large part to the decline in exports caused by the Eurozone crisis.

It predicts export growth of three per cent, adding 0.4 percentage points to GDP.

However, “this will be dependent on the UK’s ability to continue to re-orient exports away from the Eurozone to the rapid growth markets, such as India and Indonesia”.