Interest rates will stay on hold until late 2012, says Cebr

This week Cebr has forcasted that UK interest rates will stay on hold for at least two years, with an extra £100bn of quantitative easing being pumped into the economy.

It believes the UK economy will show growth of 1.6% in 2010 and 1.3% in 2011, 1.4% in 2012, 1.8% in 2013 and 2.4% in 2014.

It says given the normal margin of forecasting error, these forecasts imply a one in ten chance of negative growth for the UK economy in 2011, though Cebr sticks to its view that a world double dip is unlikely because of the strength of the emerging economies.

However, partly because of the effect of the VAT hike in January 2011, Cebr’s central forecast for growth in Q1 2011 is only 0.1%, which implies that there is nearly a 50% chance of negative growth for that quarter.

The new forecasts incorporate Cebr’s predictions for the effects of the Comprehensive Spending Review to be announced this week.

The report says: “‘We expect the authorities to push the monetary policy levers hard in the opposite direction to the fiscal policy levers.

“Our forecasts include an additional £100 billion in quantitative easing; base rates remaining at 0.5% till late 2012 at least and 10 year gilt yields at in the 2.5 to 2.75% range till end 2013.

“The relationship between monetary policy and economic growth is less predictable than that for fiscal policy and growth in the short term, particularly at times when the flame of economic growth is weak.

“Had a decision not already been made which is administratively difficult to reverse at short notice we would have been tempted to call for the VAT rise to 20% in January 2011 to be postponed.”

Charles Davis, managing economist and main author of the report, says: “All the business survey evidence suggests that despite the consumer starting to run down savings again, confidence remains weak. With the end of the recovery from restocking growth will be slow in the coming months, even without fiscal retrenchment.

“So the levers of monetary policy will be aggressively moved to fast forward again to offset the impact of the CSR in the coming years.”

However these are just predictions, we will have to wait and see what happens over the coming year.