Posted on Wednesday 5 March 2014 by Ulster Business

Bank of england

Record low interest rates will probably continue for at least one more year, according to one of Northern Ireland's best known economists.

Angela McGowan, chief economist at Danske Bank, was speaking ahead of Thursday's meeting of the Bank of England Monetary Policy Committee, which is expected to see the bank hold interest rates at 0.5 per cent and maintain its current stock of asset purchases.

The expected decision would mean it is five years since the central bank cut the cost of borrowing to its lowest level since 1694 in response to the global financial crisis.

MPC committee members have been at pains to stress that when rates do start rising they will do so slowly and will likely remain low for some time relative to the ten years before the crisis – when the base rate averaged about 5%. It's a forecast that Danske's economist believes the bank is likely to stick to.

"No one anticipated back in March 2009 when the Bank of England dropped interest rates to 0.5 per cent that this record low level would be maintained for the next five years. Furthermore, despite the myriad of positive economic indicators released in the last six months, it is anticipated that a 'six-year anniversary' for low interest rates will most probably be reached," said Ms McGowan.

"The UK recovery has undoubtedly strengthened, but the Bank of England's Monetary Policy Committee members are determined not to tamper with rates too early in the recovery process. In the first instance the Bank wants to see the current level of slack or 'spare capacity' in the economy reduced – with current estimates suggesting that spare capacity equates to somewhere between 1 and 1.5% of GDP.

"In addition, the new Governor of the Bank of England also wants to see the recovery reflect a better balance between private demand and business investment before interest rates are adjusted," the economist added.

"Other factors are also at play and are keeping the Bank of England away from an imminent rate hike. For example, a relatively low inflation rate is expected to prevail for most of this year (so no interest rates hikes needed to keep prices under control) and of course the stronger pound is an issue too. If sterling continues to strengthen, the stronger pound could play havoc with any government ambitions to attain export-led growth."


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