The Bank of England base rate may stay low for a number of years. Due to the current government’s policy of fiscal tightening there will be slow growth over the next two years or more said Ernst & Young Item Club, an independent economic forecasting group.
Professor Peter Spencer, chief economic advisor to the Item Club believes the following will occur:
-Budget cuts will slow down economic growth
-Inflation will remain above the Monetary Policy Committee’s target of 2 per cent for 18 months but will then drop as the effects of high energy prices and increases in VAT wear off
-To prevent inflation from dropping below 1 per cent the Bank of England will be forced to keep the base rate at 0.5 per cent for many years.
Professor Spencer said: “A base rate of 0.5 per cent will begin to look like the new normal.”
This will have an effect on savers. Interest rates typically fluctuate with the Bank of England’s base rate. With such smaller return on savings accounts for the next years savers will need to carefully consider and shop for the best return on their deposits.