Rates to stay on hold till 2014, says Ernst & Young

The Bank of England base rate is set to stay at 0.5% until 2014, according to the latest Ernst & Young ITEM club quarterly forecast.

The report says the risks of overheating and deflation in the British economy have both been exaggerated. As a result, while increases in commodity prices and value added tax (VAT) will keep CPI inflation above its target over the next year, the ITEM club forecasts CPI to move below the 2% target from January 2012 when the next VAT increase drops out of the calculation.

“Despite the mounting tensions within the MPC, this prospect is likely to keep Bank base rate on hold next year and the forecast does not see it increasing until 2014,” says the report.

Meanwhile, despite forecasting no double-dip recession the report says after a “surprisingly strong” first half of the year, the British economy is heading for a “soft patch” over the winter as the pace of recovery loses momentum. (article continues below)

The forecast is for British GDP to grow 1.4% in 2010 and 2.2% in 2011.

Peter Spencer, the chief economic adviser to the Ernst & Young ITEM club, says: “The economy is likely to slow over the winter following a surprisingly positive first half of the year, but I think this will be a soft-patch, not a double-dip.

“Things should start to improve towards the end of 2011. Until then … economic recovery really is dependent upon the extent to which business and services organisations, whether they are in education, entertainment or whatever, can increase their overseas income flows as the home market stagnates.

Spencer adds that while he expects a slowdown in export growth this winter, “we remain confident that export growth will dominate imports next year, with net trade forecast to add 1.3% to GDP and another 0.6% in 2012, pushing the UK’s current account into surplus.”