UK interest rates expected to remain at historic low for rest of year, it is claimed

News - Banking

Written by Ray Clancy

Friday, 09 July 2010 10:23

The Bank of England interest rate is likely to remain at its current low for the rest of the year as Sterling improves and last month’s Budget removed lingering fears that the UK could lose its AAA credit rating, according to analysts.

Yesterday’s decision by the bank to keep interest rates at 0.5% means that it is the longest period of unchanged Bank Rate since the Queen ascended to the throne in 1953.

And it is likely to remain there for some time according to Ray Boulger of independent mortgage advisors John Charcol but the one cloud on the horizon is the eurozone debt problems.

‘The market has responded positively to the confirmation provided by the Budget that the coalition has adopted a more fiscally prudent policy than the previous government. One factor that drove inflation up was the weakness of Sterling but the impact of this is now not only unwinding but the recovery in Sterling is starting to exert the opposite effect,’ he said.

‘The combination of the Euro being under severe pressure and the budget removing any lingering fears about the UK Government losing its AAA credit rating has resulted in the improvement in Sterling. It is now 12% off its low point last year against the Euro and 6% off its recent dollar floor only a couple of months ago,’ he explained.

‘These factors all add to the reasons why Bank Rate will need to remain very low for an extended period and it looks increasing likely that we will not see a Bank Rate increase this year. As long as a significant risk of turmoil in the Eurozone markets remains any rise in Bank Rate would be premature,’ Boulger added.

Barry Naisbitt, chief economist at Santander UK said that the Monetary Policy Committee has been using its quantitative easing policy together with the historically low level of rates and is watching the new economic data very carefully to see whether it is meeting its expectation of the likely development of inflation and output.

‘Recent indicators, such as survey indicators of output, show a reasonably positive picture of economic activity. Of course, inflation at 3.4% is well above its target, but this is largely due to temporary factors and the Bank of England expects it to move back towards the 2% cent target as the year progresses,’ he said.

‘Inflation is expected to persist over 2% for some time and as the economic recovery builds the argument for starting to normalise rates is likely to become stronger, especially to prevent inflation expectations rising. But given the economic backdrop it looks as if rates will continue to be exceptionally low for some time yet,’ he added.