Bank could keep rates low until 2013

The Bank of England today gave a clear signal that the UK will mirror the United States in keeping interest rates at record lows until 2013.

While Sir Mervyn King refused to follow US counterpart Ben Bernanke in pledging low rates, today's figures echo the City's view that inflation will be below its 2% target in two years' time - even with rates at around 0.5%.

Economists said the latest projections show that the Bank could hold off from raising rates until 2013, extending a run that has seen the cost of borrowing stay at its record low for 29 months.

The prospect of an extended freeze in rates has already driven the price of a fixed rate mortgage to an all-time low as lenders factor in a longer spell with the Bank's base rate at rock-bottom.

However, it has meant more misery for pensioners and savers who will continue to suffer low returns on their money.

The US Federal Reserve gave a lift to beleaguered stock markets yesterday by announcing that US interest rates were likely to stay at their "exceptionally low levels" until at least mid-2013.

Sir Mervyn stressed that given how quickly things can change he would not be echoing the Fed in explicitly committing to keep interest rates on hold.

He also kept markets guessing about whether more quantitative easing is on the cards, stressing that more stimulus measures depended on the outlook for inflation.

Market forecasts are for interest rates that edge up from 0.50% to 0.75% around the start of 2013. They are then seen rising very gradually to 1.50% in late-2013/early-2014 and to around 2% by the third quarter of 2014.

The forecasts are based on the assumption that the stock of quantitative easing is kept at £200 billion.

Vicky Redwood, senior UK economist at Capital Economics, said: "Given just how far market interest rate expectations have fallen in the last few weeks, there was a risk that the report would signal that markets had got ahead of themselves.

"But in fact, the report appeared fully to endorse the recent drop in rate expectations."

Howard Archer, chief UK economist at IHS Global Insight, added: "The fact that consumer price inflation is seen modestly below its 2% target level on the two-year horizon based on these assumptions suggests that the Bank of England could even hold off from raising interest rates until well into 2013."