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Interest rates will remain on hold till 2012

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  • 24/06/2010
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Slower growth caused by the fiscal squeeze will force the Bank of England to keep interest rates lower for longer, according to economics consultancy cebr.

Cebr said that the Office of Budget Responsibility (OBR) predictions for economic growth could still prove too high due to unemployment continuing to rise, the weakness of real disposable income growth and the constraint on bank lending.

It said if this was the case, then a further fiscal squeeze could lie ahead.

This is despite the OBR downwardly revising its pre-Budget forecast for growth in 2011 from 2.6% to 2.3%.

Cebr said that the constraints on bank lending will also cause private sector investment to recover more slowly.

It added that if economic growth is lower than the OBR expects, public borrowing will likely have been underestimated and further spending cuts and or tax rises could be necessary.

However, cebr said that the fiscal tightening announced in the emergency Budget will result in lower long-term interest rates, as bond markets react positively to clearer plans for reducing the deficit. In addition, the Bank of England may respond to slower growth by keeping interest rates lower for longer.

Charles Davis, managing economist at cebr, said: “We think the Office for Budget Responsibility’s projections for growth are still on the high side. We see a weaker consumer recovery and more risks to the export led recovery than the OBR.

“Although inflation has been above target in early 2010, the fiscal tightening announced today means growth in demand will be weakened, so we expect the Bank of England to keep interest rates lower for longer – on hold at 0.5% into 2012.”

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