Interest rates won't rise before the summer as the UK's economic recovery slows, Cebr forecasts

Economic growth will start to slow, Cebr predicts
Pushed back rates rise forecast thanks to global economic uncertainty

By Rachel Rickard Straus for Thisismoney.co.uk

Published: 01:02 EST, 28 September 2015 | Updated: 03:09 EST, 28 September 2015

112

View
comments

Interest rates will not rise before the middle of next year as the UK's economic recovery begins to slow, economists have forecast.

The Bank of England has kept rates at a record low of 0.5 per cent since March 2009.

Members of the Bank of England team who decide on interest rates – the monetary policy committee – have been hinting in recent weeks that rates will start to rise again in the near future, although at a very slow pace.

However the Centre for Economics and Business Research today pushed back its prediction for the first rate rise in six years from February to the summer.

New forecast: The Cebr has pushed back its predictions for a first rate rise

It said the key driver of the change in its view was concerns about the global economy.

It also predicted that the rate of growth in the UK economy will start to slow from 2.5 per cent this year to two per cent in 2016 and 1.7 per cent between 2017 and 2020.

It noted that its forecast diverges with that of the Office for Budget Responsibility, which expects growth above two per cent throughout this period.

The Cebr gave a number of explanations for its gloomier outlook.

It noted that export prospects and business investment are being held back by a general global economic slowdown, driven by significant weakness in China in particular and emerging markets more generally.

These factors will only weigh heavier on the UK economy over time, unless there is an upturn, it said.

Meanwhile it predicted the level of consumer inflation is expected to remain below the Bank of England's target of two per cent until 2017, easing the pressure on the Bank to increase rates.

Another few months of rock-bottom interest rates is likely to offer relief to homeowners, who are benefiting from some of the lowest mortgage rates ever seen.

It also delays the pain likely to be seen by hundreds of thousands of households drowning in high levels of consumer debt, who will see repayments gnawing even further into their disposable incomes once rates start to rise.

Adapting: The Bank of England may choose to delay an interest rate rise due to the global economic uncertainty, the Cebr suggested today

However another prolonged period of rock-bottom rates will not be well received by savers, who have now suffered years of low returns from their nest eggs.

Scott Corfe, head of macroeconomics at Cebr, says, 'It's clear that the global economy has deteriorated significantly over the past few months and there are significant downside risks to the UK's own prospects.

'With inflation expected to remain below the Bank of England's central target of two per cent until 2017, we think the Bank Rate will remain on hold until the middle of next year.

'A rate rise in May or August seems most likely, to coincide with the Inflation Reports released in these months'. 'Even when the Bank of England does rates rates, we expect the pace of rate rises to be very gradual. Even by 2020, we expect the Bank Rate to stand at just two per cent - what Cebr believes is the 'new normal' for interest rates.'

New normal: Bank of England governor Mark Carney has said for some time that when interest rates do rise, they will rise slowly and gradually

A number of economists have expressed concerns about the sustainability of the UK's recovery because it is driven by consumer spending, rather than selling goods and services abroad.

The Cebr said: 'Household spending, not trade or investment, will account for the clear majority of the growth seen over the next five years.

'Net trade will act as a drag on growth over this timeframe as the UK continues to import far more than it exports.'

The body said the UK's current account deficit - a measure of the country's trading position with the rest of the world - is expected to average 'an enormous' £77 billion per annum over the period 2015-2020.

It said this reflects 'sluggish export growth as well as poor returns on overseas investments as the global economy stumbles'.