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Rates to stay below 2% for five years

The Bank of England may keep rates below 2 per cent for the next five years, according to the Centre for Economics and Business Research.

The think tank has forecasted that the all-time low base rate of 0.5 per cent will remain in place until 2011 at least, and will remain below 2 per cent to 2014.

Its forecasts also think an additional £75bn of quantitative easing will be needed to shore up the UK economy – it also indicates a sharp fall in the long bond yield to 2.8 per cent by 2011 and 2.5 per cent by 2013.

The CEBR also predicts a weaker pound, falling to $1.40 and possibly below €1.00.

Senior economist Charles Davis says: “The risk to the scenario in our forecasts are from the world economy and from inflation. Our forecasts show low levels of labour cost inflation which should keep the CPI low enough to prevent the Bank of England from having to raise rates until the economy is recovering. But this does require the prices of oil, primary commodities and food not to rise so fast that with a weak pound they dominate the impact of low labour costs.”

The forecasts all assume that the incoming Government will need to get the budget deficit down to £50bn by 2015 – without fiscal action the forecasts predict a deficit of £143bn by that time.

CEBR chief executive Douglas McWilliams says: “We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward. 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.”

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