Interest rate expected to stay on hold until 2013 says expert

Interest rates may stay at current record lows well into 2013 says Peter Spencer, chief economist of the highly respected Ernst & Young ITEM club.

This headline has been widely reported in the newspapers (click here to see coverage from Citywire). Peter Spencer predicts that government cutbacks will slow the pace of the recovery and while inflation will rise in the short-term (partly as a result of the imminent VAT increase) it will eventually settle back within the government’s 2% target.

He goes on to say that interest rates will need to held at 0.5% in order to stop the CPI measure of inflation falling below 0% (CPI is always below RPI). But a caveat to this headline is that it is based on the assumption that the proposed government spending cuts actually materialize.

This is far from certain in itself because as we all know it’s one thing creating a budget plan, but another thing actually sticking to it. So while this story is headline grabbing you certainly should not rely on it coming true.

While we are on the subject of interest rates, next week we will be reviewing both our interest rate predictions as well as the time on the Money to the Masses interest rate clock.