Low interest rates to ‘last throughout 2010’

Author: By Russell Lynch, Press Association

Markets had expected a rate hike in the third quarter of 2010 with borrowing
costs standing at 1.5 per cent or more by the end of the year – but the
Bank’s forecasts say inflation will undershoot the 2 per cent target if this
happens.

This signals borrowing costs will stay low for longer or that the Bank could
lift efforts to boost the money supply through its quantitative easing
programme, which currently stands at £200 billion.

Howard Archer, chief economist at IHS Global Insight, said: “Any policy
tightening remains a long way off and interest rates are likely to stay down
at 0.5 per cent until at least late 2010, and very possibly beyond.”

The pound lost more than a cent against the dollar after the Bank’s forecasts
were published with interest rate rises an even more distant prospect –
although the forecasts are good news for those households with a tracker
mortgage linked to Bank rate.

Governor Mervyn King also welcomed the weakness of sterling as one of the
factors which would aid the UK’s pull out of recession in 2010.

Capital Economics’ chief European economist Jonathan Loynes added any move
from the Bank to put the economic brakes on remained “a long way off” and
said it was too early to rule out further aid to the economy through QE.

“At the very least, the disinflationary effects of the vast amount of slack in
the economy, combined with the coming fiscal squeeze, suggest that monetary
policy is unlikely to be tightened for a prolonged period,” he said.

JP Morgan economist Malcolm Barr stuck by forecasts for an end to QE and a
“modest” rise in rates in the second half of 2010 – but added that his
forecast depended on data “which starts to deliver more convincingly on a
step-up in activity in the UK”.

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