Item Club - "keep Interest Rates Below 0.5% Until 2014"

[OnionTerror]

http://www.telegraph.co.uk/finance/economics/interestrates/7908817/Interest-rates-will-stay-low-until-2014-predicts-EandY.html

The Ernst & Young ITEM Club said the Bank of England will have to resist calls to raise rates above 0.5pc for more than three years to counterbalance the Government's growth-sapping austerity cuts. Peter Spencer, ITEM's chief economic adviser, added that the Bank may even have to restart its £200bn quantitative easing programme.

He said: "Monetary policy [will have to] remain very loose in order to offset the dampening effects of fiscal policy. Further asset purchases cannot be ruled out if there are signs that the recovery is relapsing."

ITEM's interest rate forecast is strikingly different from the Treasury's official position, compiled by the Office for Budget Responsibility (OBR), for rates to rise next year and reach 3pc by 2014. Assuming rates stay at 0.5pc, ITEM expects the economy to grow roughly in line with OBR forecasts at 2.2pc next year and just below 3pc for the following three.

Pressure for an early rate rise mounted last week after data from the Office for National Statistics showed the economy grew at 1.1pc in the three months to June, almost double forecasts. However, Mr Spencer said: "The GDP figures don't change the general picture of a patchy, sporadic recovery, which picks up very gradually."

Low interest rates will be hard to sustain, he warned, as inflation will remain above target until the end of 2011.

"It's actually a very tricky situation for the Bank because VAT increases will keep inflation well above target until the end of next year, with all sorts of people saying that rates should be raised," he said.

Despite low interest rates, ITEM does not expect house prices to continue rising. "With unemployment high and confidence fragile, particularly in light of the impending tax increases and public spending cuts, the mini-housing market recovery of the past year looks increasingly unsustainable," the report said.

ITEM's forecasts imply stronger long-term growth following the emergency Budget than under Labour's plans, and it made its support for the austerity measures clear by saying: "As Mrs Thatcher famously said in 1976, 'Socialist governments… always run out of other people's money'. Of course, that's exactly what happened under Mr Brown. Now, the coalition government is picking up the pieces."

[Mega]

They cut spending...people will start to kill off....they bottle out (i think they already have). At that point they print, thus the £ will fall & the BOE will have no choice!

Mike

[interestrateripoff]

They have no choice but to try and keep rates low the entire system is insolvent. Increasing rates by the old 25 points at a time will be suicide.

[Hold Fast]

They cut spending...people will start to kill off....they bottle out (i think they already have). At that point they print, thus the £ will fall & the BOE will have no choice!

Mike

As a saver there's nothing I'd like more than for interest rates to go up. I'm starting to wonder if we're not in Japan territory though.

Assuming that the pound starts to fall, would the BOE be obligated to put rates up? Its pretty obvious their remit to control inflation has been abandoned.

At what point do they have to say enough is enough, we can't protect underwater property loans any more?

[Pent Up]

With GDP growing at 1.1% they can no longer argue that the economy Is too fragile. This also causes further upward inflation pressure combined with the raise in VAT makes the outlook for inflation much worse than thought. On top of this I think it's becoming quite clear the the spare capacity in the economy is no where near enough to bring inflation down on it's own.

They are running out of excuses now.

[hpc-craig]

One thing that has struck me about the Item Club throughout this whole debacle (since 2007) is how off the mark they consistantly are. 'House prices will not falter' and 'UK banks are 100% safe' spring immediately to mind.

They seem to be utterly clueless.

[babesagainstmachines]

They seem to be utterly clueless.

They know exactly what they are doing. Stating what they want and dressing it up as forecast, to try and influence.

[Cicero]

They know exactly what they are doing. Stating what they want and dressing it up as forecast, to try and influence.

Agreed, and it is a course of action nicely eliminating any spare change from our collective pockets.

[abharrisson]

The item club have it right.. rates will remain low.. certainly below 1% for years and years.

You'll find all sorts of rationale to offset the inflation news.... imported inflation, tax rises, oil driven inflation casued by short term instability, non-consumption led inflation, chinese currency inflation led results etc etc... as long as they can say the casue is shorter term and no-consumption led they'll be able to make a case that the economy is not overheating and that therefore there is no reason to raise rates... in many cases they are right.

We'd have to see GDP growth galloping along before rates are rasied in my view... anyone pinning their future on interest rate rises triggering a wider fall in te housing market is in my view being very unrealistic.

[billybong]

.........................with all sorts of people saying that rates should be raised," he said.

That'll be the honest and responsible people and the like that they're referring to there.

Edited July 25, 2010 by billybong

[billybong]

and it just confirms how awful things really are despite the boom that the ConDems are now claiming and claiming credit for since they got in just a couple of months ago. Where will they all be when the double dip recession turns up, somewhere else for certain.

It's all truly farcical and tragic the way they try to run the country.

[lets get it right]

The great thing about the Ernst and Young end-of-the-pier Item Club is that they are a bunch of useless feckwits who are wrong about everything they pontificate on.

Why anyone publishes their daft ravings baffles me.

[okaycuckoo]

According to Calculated Risk, historically the Fed only begins to raise rates 12 months after unemployment has peaked. That could take a while, and I guess the BoE will be in lockstep with them.

Calculations of UK repo rates for mortgages estimate slight increases for the next three years ... based on a slow improvement in the employment rate.

Edited July 26, 2010 by okaycuckoo

[stuckmojo]

Agreed, and it is a course of action nicely eliminating any spare change from our collective pockets.

it's not just that. They want savers to not-save. They want them to use the savings as collateral on more borrowed money and re-flate asset prices.

That's what the vultures want

[Darkman]

They have no choice but to try and keep rates low the entire system is insolvent. Increasing rates by the old 25 points at a time will be suicide.

Yes, this sounds about right. There isn't really a lot of choice.

If rates aren't kept low, the housing market implodes, taking the banks with it. Total meltdown. So much is reliant on the housing market now, that it can't be allowed to crash too harshly or suddenly.

Looks like rates to stay low, and a very long drawn out house price "crash".