Low Interest Rates Possible Until 2013

According to the Bank of England Report published yesterday, Low interest rates could be with us for some time.

The Centre for Economics and Business Research (Cebr) said that the reality of a deep recession and slow recovery has dawned upon the MPC, recognizing that dull growth and downward pressure on prices may be of the greater concern.

The inflation may dip below 1.0 per cent according to the Bank’s central expectation. The Cebr said that this implies that on the current scale of quantitative easing and market expectations on interest rates inflation will continue to undershoot the 2.0 per cent target through to 2013.

According to Cebr, this implies three things. First of all, more quantitative easing is on the cards. Our rough and ready estimate is a further GBP 50 billion. Secondly, the Bank is clearly not expecting to roll back the QE at all soon. Third, interest rates are likely to remain lower for longer than the markets expect, even predicting Bank Rate will stay at 0.5 per cent until the end of 2011.

Since the current medium term growth projections are more bearish compared to those on which budget was based, we should expect that the fiscal deficit will also be much larger than government expectations and announcements. Debt to GDP ratio needs to be stabilized. In order to achieve that goal, we need a cut in government spending and increase taxes.

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