UK rates 'to stay low for years'

UK interest rates will stay low for years amid tax rises and spending cuts, according to an economic forecast.

The Centre for Economics and Business Research (CEBR) believes the rate will remain at its current 0.5% level until 2011 and not reach 2% until 2014.

The report predicted the pound will weaken further, falling to $1.40 and "possibly" below 1 euro.

Its forecast is based on the government managing to slash the UK budget deficit by £100bn over the next parliament.

It says that about £80bn of this would come from spending cuts, and a further £20bn from tax rises.

'Policy mix'

Such a squeeze on public finances would severely limit economic growth, meaning the Bank of England had to keep rates low to make borrowing money affordable, the CEBR argues.

"We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward," said Douglas McWilliams, CEBR chief executive and one of the report's authors.

"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."

Last week the Bank of England held interest rates at a record low of 0.5% for the seventh consecutive month.

The CEBR added that the Bank programme to increase the amount of money in the economy - so-called quantitative easing - would increase by £75bn from the £175bn so far announced.

And it predicted that the UK economy would grow by 1.3% in 2010 - having shrunk by 4.3% this year.