News : Interest rates to stay low until 2013
The Governor of the Bank of England, Sir Mervyn King, is predicted to indicate that interest rates will not rise from their record low until late 2013 at the earliest, due to disappointing growth in the UK.
The base rate is projected to remain on hold as the bank once again uses its quarterly inflation report to cut its forecast for the UK's economic activity and brace for higher-than-expected inflation.
"It is odds-on that the new forecasts contained in the report will be the all too familiar and dispiriting mix of reduced growth but higher inflation expectations," said Howard Archer, chief UK economist at IHS Global Insight.
"We expect it to indicate that interest rates are unlikely to rise from the current level of 0.5% until at least late-2013, and very possibly not until 2014."
The return to recession reported by the Office for National Statistics for the first three months of this year means that economic growth has already fallen short of that predicted by the Bank three months ago. Inflation meanwhile is proving more persistent than anticipated, currently running at an annual rate of 3.5%.
The combination of a stagnating economy and rapid price rises represents a headache for the Bank's monetary policy-makers as raising rates to tackle inflation could harm growth.
Economists therefore expect the Bank to signal that rates – cut to their current low in March 2009 – will remain on hold for many months more, even though inflation is well above its official 2% target.
The Bank's monthly policy meeting last week made no change to its strategy, with the Bank Rate left at 0.5% and its money-printing programme of quantitative easing (QE) at £325bn.
Economists believe that the door remains open to the possibility of more QE, either explicitly or by forecasting that inflation will probably fall below the 2pc target within two to three years without a change in policy.
"Such a forecast would prepare the ground for the Monetary Policy Committee to resume QE in coming months if activity data and the European monetary union crisis worsen, or if the inflation worries diminish," said Michael Saunders at Citi.
