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UK rates to remain low for years amid tax rises and spending cuts

Sterling en route to be equivalent to less than 1 Euro, says CEBR

UK interest rates will stay low for years amid tax rises and spending cuts, according to an economic forecast. The Centre for Economics and Business Research (CEBR) believes the rate will remain at its current 0.5% level until 2011 and not reach 2% until 2014.

The report, due on Monday, will predict the pound will weaken further, falling to 1.40 US dollars and “possibly” below 1 Euro. Its forecast is based on the government managing to slash the UK budget deficit by £100 billion over the next parliament. It will say that about £ 80 billion of this would come from spending cuts, and a further £20 billion from tax rises.

Such a squeeze on public finances would severely limit economic growth, meaning the Bank of England had to keep rates low to make borrowing money affordable, the CEBR will argue.

“We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward,” said Douglas McWilliams, CEBR chief executive and one of the report's authors.

“Our analysis says that this ought to work. If it does so, we are likely to see a major re-rating of equities and property which in turn should stimulate economic growth after a lag.”

Last week the Bank of England held interest rates at a record low of 0.5% for the seventh consecutive month. The CEBR added that the Bank program to increase the amount of money in the economy - so-called quantitative easing - would increase by £75 billion from the £175 billion so far announced. And it predicted that the UK economy would grow by 1.3% in 2010 - having shrunk by 4.3% this year.