Interest rates will be low for long time yet
INTEREST rates will need to stay at their historic low of 0.5 per cent until 2014 to offset the coalition government’s ambitious austerity measures, leading economic forecaster the Ernst & Young ITEM club will say today.
Though consumer price index (CPI) inflation will remain above target over the next 18 months, it will be necessary to keep rates at this ultra-low level to prevent CPI inflation from moving significantly below target over the rest of the forecast period.
The impact of higher energy prices and taxes will wear off and spare capacity will bear down on price decisions and wage bargaining, the ITEM club said in its quarterly economic forecast published today.
Assuming that rates remain at 0.5 per cent, the ITEM club forecasts that chancellor George Osborne’s ambitious plans for fiscal tightening won’t choke off Britain’s economic recovery but they will hold back the pace of growth over the next two years.
It said that GDP will grow by 1 per cent this year and 2.2 per cent in 2011 but that the pace of growth will speed up to almost 3 per cent in 2013 and 2014.
Peter Spencer, chief economic adviser to the ITEM Club, said: “The new coalition’s plans to cut the deficit are certainly ambitious. But the bulk of the additional tightening is set to come in the second half of the parliamentary term, when we believe that the recovery will be firmly entrenched and the economy should be able to deal with the headwinds from the Budget.”
Business will need to play the lead role in driving the economy as the consumer is in “no position to pull us out of recession this time”, he said.
ITEM also urged companies to take advantage of the tax incentives presented in the Budget.