In a report our today by the The Ernst & Young ITEM Club forecast that the base rate will remain on hold until the end of 2013. However, this is dependent on the assumption that the impending spending cuts actually come through.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, says: “A base rate of 0.5% will begin to look like the new normal.” He goes on to say that fiscal tightening implemented by the new coalition should not choke off the recovery, but it will slow UK economic growth over the next two years.
It says high energy prices and the increases in VAT will keep CPI inflation above target over the next 18 months, but it will then move well below 2% as these effects wear off and spare capacity bears down on pricing decisions and wage bargaining.
To prevent CPI inflation moving below 1% it says it will be necessary to keep the Bank base rate low at 0.5% for much longer than the markets have anticipated.
The chancellor’s five-year plan to cut the deficit while keeping the pace of the economic recovery is very ambitious.
But ITEM Club believes that in the long term it will lead to more sustainable high-quality growth from 2013 because it will be led by business investment and exports, rather than public spending.
Spencer says: “On the assumption that the government is able to implement the overall reduction of £40bn it set out in the budget, we expect that UK growth will struggle to reach 1% this year but will gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment.”
Enable Business Finance welcome the news and have firmly believed that interest rates would have to remain low over the short to medium term if we are going to see growth. What is more important that low interest rates is that for Bank and Financial Institutions to start lending to small to medium sized businesses. There is still strong evidence that small businesses are being starved of working capital.