Low interest rates to 'last throughout 2010'

Interest rates could stay at record lows of 0.5 per cent throughout next year to underpin a UK recovery, experts said today.

Markets had expected a rate hike in the third quarter of 2010 with borrowing costs standing at 1.5 per cent or more by the end of the year - but the Bank's forecasts say inflation will undershoot the 2 per cent target if this happens.

This signals borrowing costs will stay low for longer or that the Bank could lift efforts to boost the money supply through its quantitative easing programme, which currently stands at £200 billion.

Howard Archer, chief economist at IHS Global Insight, said: "Any policy tightening remains a long way off and interest rates are likely to stay down at 0.5 per cent until at least late 2010, and very possibly beyond."

The pound lost more than a cent against the dollar after the Bank's forecasts were published with interest rate rises an even more distant prospect - although the forecasts are good news for those households with a tracker mortgage linked to Bank rate.

Governor Mervyn King also welcomed the weakness of sterling as one of the factors which would aid the UK's pull out of recession in 2010.

Capital Economics' chief European economist Jonathan Loynes added any move from the Bank to put the economic brakes on remained "a long way off" and said it was too early to rule out further aid to the economy through QE.

"At the very least, the disinflationary effects of the vast amount of slack in the economy, combined with the coming fiscal squeeze, suggest that monetary policy is unlikely to be tightened for a prolonged period," he said.

JP Morgan economist Malcolm Barr stuck by forecasts for an end to QE and a "modest" rise in rates in the second half of 2010 - but added that his forecast depended on data "which starts to deliver more convincingly on a step-up in activity in the UK".