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October 12, 2009    

UK interest rates to remain at record low for medium-term

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by Kay Murchie

Influential think tank, the Centre for Economics and Business Research (CEBR), believes interest rates will remain at their current historic level of 0.5% until 2011.

Meanwhile, rates will not reach 2% until 2014 as a result of the severe fiscal squeeze on the UK economy which will result in tax rises and spending cuts.

According to its economic forecast, the CEBR said that an incoming Government will implement £100 billion of fiscal tightening, which will be divided between £80 billion of spending cuts and £20 billion of tax hikes.

Douglas McWilliams, CEBR chief executive, comments: “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 rerating of equities and property which in turn should stimulate economic growth after a lag,” he added.

Last week, the Bank of England’s Monetary Policy Committee elected to retain interest rates at the historic low of 0.5% - the seventh consecutive month that rates have been at this level.

Finally, the CEBR is forecasting that the UK economy will expand by 1.3% in 2010 - having contracted by 4.3% this year.

The CEBR’s prediction of low interest rates will certainly give a boost to mortgage holders who have opted to stay on their lender’s standard variable rate (SVR), which have suddenly become an attractive option compared to many fixed-rate deals.

Recent figures from Unbiased.co.uk revealed that over one quarter (27%) of homeowners are on their lender’s SVR mortgage and do not have any plans to change, compared with 23% earlier in the year.

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