Rate rise unlikely until next summer: CEBR

Rate rise unlikely until next summer: CEBR

The Bank of England is unlikely to raise interest rates until the middle of next year, according to the latest forecasting from the Centre for Economics and Business Research.

The UK economy should grow by 2.5 per cent this year, but growth is expected to slow to 2 per cent in 2016 and then average just 1.7 per cent from 2017 to 2020.

In contrast, the Office for Budget Responsibility expects growth to remain above 2 per cent over this period.

Article continues after advert

The think-tank stated there are significant downside risks to these forecasts.

The global economic slowdown, driven by substantial weakness in emerging markets - most notably China - is holding back export prospects and curbing business investment.

The Bank of England is expected to keep rates on hold for longer in response to this deteriorating global backdrop.

However, Mark Carney, governor of the Bank of England, warned in July that interest rates could increase as soon as the “turn of the year”, emphasising an increase is needed to return inflation to the 2 per cent target.

In August, inflation dropped back to zero per cent, however it has been hovering either side of this for some months.

CEBR said CPI inflation is expected to stand at less than 2 per cent until 2017, giving the central bank room for manoeuvre to keep rates on hold.

The economic policy and research firm also expressed concerns about the sustainability of the current economic recovery.

Household spending, not trade or investment, will account for the clear majority of the growth seen over the next five years, it stated.

Net trade will act as a drag on growth over this timeframe, as the UK continues to import far more than it exports.

Scott Corfe, head of macroeconomics at CEBR, said it was clear that the global economy has deteriorated significantly over the past few months and there are significant downside risks to the UK’s own prospects.

“With inflation expected to remain below the Bank of England’s central target of 2 per cent until 2017, we think the bank rate will remain on hold until the middle of next year.

“A rate rise in May or August seems most likely, to coincide with the inflation reports released in these months.”

He added that even when rates do eventually rise from their historic freeze, the pace will be very gradual.

“Even by 2020, we expect the bank rate to stand at just 2 per cent – what CEBR believes is the ‘new normal’ for interest rates,” Mr Corfe added.

In August – the 77th straight month of rates held at 0.5 per cent – the Monetary Policy Committee recorded its first vote split this year, with Ian McCafferty voting in favour of a rate rise, while most economists had been expecting a 7-2 split.