CEBR: rate rise on hold until mid-2016

Cebr expects the UK economy to grow by 2.5% this year. However, growth is expected to slow to 2.0% in 2016 and then average just 1.7% over the years 2017-2020. In contrast, the Office for Budget Responsibility expects growth to remain above 2% over this period.

Cebr says that there are significant downside risks to these forecasts. The global economic slowdown, driven by substantial weakness in emerging markets (most notably China), is holding back export prospects and curbing business investment. If the world economy continues to falter, then these weights on growth will become even bigger.

The Bank of England is expected to keep rates on hold for longer in response to this deteriorating global backdrop. Inflation on the consumer price index measure is expected to stand below 2% until 2017, giving the Bank room for manoeuvre to keep rates on hold.

Cebr has also expressed concerns about the sustainability of the current economic recovery. The forecasting house predicts that household spending, not trade or investment, will account for the clear majority of the growth seen over the next five years. Net trade will act as a drag on growth over this timeframe as the UK continues to import far more than it exports. The current account deficit – a measures of the UK’s trading position with the rest of the world – is expected to average an enormous £77bn per annum over the period 2015-2020. This reflects sluggish export growth as well as poor returns on overseas investments as the global economy stumbles.

Scott Corfe, Head of Macroeconomics at Cebr, said:

“It’s clear that the global economy has deteriorated significantly over the past few months and there are significant downside risks to the UK’s own prospects.

“With inflation expected to remain below the Bank of England’s central target of 2% until 2017, we think the Bank Rate will remain on hold until the middle of next year. A rate rise in May or August seems most likely, to coincide with the Inflation Reports released in these months.

“Even when the Bank of England does rates rates, we expect the pace of rate rises to be very gradual. Even by 2020, we expect the Bank Rate to stand at just 2% – what Cebr believes is the ‘new normal’ for interest rates.”