Interest rates to stay put for several years

Interest rates could stay at a historically low level for several years to come, a leading think tank has said. The Ernst & Young Item Club said that problems with the euro mean that it can't see interest rates being increased in the foreseeable future.

"The [economic] data has generally been a little stronger over the past month but significant downside risks remain, not least from the escalation of the eurozone sovereign debt crisis," the Item Club report said. "While we have probably moved even further away from the possibility of further QE [quantitative easing], we are still some way away from any rise in interest rates."

As for worries about inflation, the report said that price increases were due to temporary factors. "In our view, the scope for it to become embedded in expectations is limited. Given the range of risks to the outlook, any increase in rates now would have been premature. Assuming that the Government tightens fiscal policy as planned, we expect the bank rate to remain at 0.5 per cent for several years."

The Item Club's analysis follows a pattern of forecasts of interest rates staying at the same 0.5 per cent well into 2011 and perhaps even beyond.