The Bank of England interest rate could remain at just 0.5% for five more years, an economic group has forecast.

The base rate has been just 0.5% - an all-time low - since March, and economists agree it will remain 'low' for years.

However, the Centre for Economics and Business Research (cebr) doesn’t believe the central bank will introduce any rate rises until 2011 – and forecasts that the official rate of interest will stay below 2% until 2014.

The cebr says the base rate cannot rise any sooner because of the government’s current fiscal deficit. Low interest rates will “encourage investment, halt the rise in savings, boost exports and restrain the growth of imports”.

“Our forecasts show low levels of labour cost inflation, which should keep the Consumer Prices Index [the official rate of inflation] low enough to prevent the Bank of England from having to raise rates until the economy is recovering,” Charles Davis, senior economist at the cebr, explains.

While there is no guarantee that the interest rate will remain under 2% for five years, most economists agree that there is little chance the base rate will rise anytime soon.

So, what should you being doing while interest rates are low? Here are Moneywise’s tips

1. Don’t let your savings suffer

Banks and building societies have responded to the all-time low base rate by cutting interest rates on savings accounts. According to official data, the average instant access savings account currently pays just 0.17% - down from 2.86% in October 2007 and 2.39% in October last year.

The average fixed-rate savings account, meanwhile, pays 2.89% - down from 6.15% and 5.62% in October 2007 and 2008 respectively.

Despite the base rate being on hold at 0.5% since March, providers continue to tinker with headline rates. According to uSwitch.com, 27 providers have cut rates by as much as 3% over the past month. In the fixed-rate market, meanwhile, around 10 providers have withdrawn accounts only to replace them with significantly less competitive deals.

Rumina Hassam, savings expert at uSwitch.com, says: "Savers haven't had an easy ride over the last six months, and these latest rate cuts must be yet another bitter pill to swallow. With the base rate remaining static, providers no longer have an excuse for cutting rates as they did during the period October 2008 to March 2009, yet still savers are being penalised with more savings shavings.”

Thankfully, there are things savers can do to fight back against rate cuts.

The first thing to do is find out what interest you are currently earning on your savings – if in doubt, call up your provider to find out. If you have an instant access or any other type of account paying a variable rate of interest, then you should aim to regularly review this to make sure your interest hasn’t been cut without you realising.

Once you’ve found out the interest rate your nest egg is attracting, the next step is to see if you could find a more profitable home for it. You can find out the most competitive savings rates on the market online using a price comparison website, or by checking Moneywise’s daily round-up of the market.

Remember, if you are over 16 and a taxpayer, then you should also look to keep the first £3,600 (or £5,100 if you are over the age of 50) in a cash ISA – this will allow your money to grow free of tax.

2. Start planning a debt-free future

Borrowers with variable-rate mortgages - including discount and tracker deals, as well as standard variable rate (SVR) loans – should have seen their mortgage repayments fall over the past year, in response to base rate cuts.

Make sure you use this saving wisely. If you have expensive debts (credit cards or personal loans, for example), then it might make sense to use the money to pay as much of this off as possible.

By increasing your repayments you will not only be a step closer to a debt-free future, but you will also reduce the overall amount you owe. For example, a borrower with a £1,000 balance on a credit card at 16.9% APR who pays the minimum repayment of 2% for 12 months, will rack up £151.74 in interest – and only bring the total debt down to £920.60 – according to research by moneysupermarket.com.

But the same customer could slash their overall balance by nearly £400 and pay nearly £30 less in interest by increasing their repayments to 5% (£50) per month. Paying 10% per month (£100) would enable the borrower to clear their debt in 12 months and only pay £79.16 in interest.

Credit card debt and overdrafts are the ‘easiest’ to tackle, as there are no repayment restrictions.

Everyone should aim to clear their credit card balance each month (thus avoiding any interest charges) but even if this is not possible, you should try to pay off as much as you can afford.

If you have a large outstanding balance racking up interest, it might be worth trying to move this onto a 0% interest-free credit card. Virgin Money’s Mastercard, for example, gives you 16 months to clear your balance without attracting any interest.

Just bear in mind that a balance transfer fee of 2.98% (minimum £3) applies and that if you fail to clear your balance within 16 months you will start to attract interest of 16.6% APR.

When it comes to tackling personal loans, however, be aware that your lender may charge you if you pay back the loan early. This will vary from lender to lender, so contact yours and find out if there are any repayment restrictions.

 

For more on tackling your debt, see Moneywise Debtwizard help page

3. Overpay on your mortgage

Making the most of low interest rates to pay off expensive debt makes sense, but in the current climate it is also a wise move to see if you can reduce the size of your mortgage.

While 2009 has seen the return of house price inflation, values are still some way off their 2007 peak and experts warn recent rises aren’t sustainable.

Making mortgage overpayments will reduce your overall mortgage term and the total amount of interest you pay on the loan. It will also protect any equity you have in your home and help create a buffer against negative equity – where mortgage debt is more than the value of a property.

Negative equity isn’t just a problem if you need to sell your home; it will also prevent you from moving onto a new mortgage deal once your initial discount or fixed period ends.

This mean you could end up being stuck on your lender’s SVR – and while this might be pretty cheap at the moment, once the Bank of England starts to increase the base rate, your repayments will increase, possibly quite sharply.

Even if you aren’t at risk of negative equity or looking to move, then you should still be aware of the danger posed by house price falls. Just as first-time buyers need to put down a deposit of at least 25% to benefit from the most competitive mortgage rates, people remortgaging onto new deals are required to have a decent equity stake in their homes.

Lenders take the loan to value (LTV) – that is, the amount you need to borrow versus the value of your home – into account when they price mortgages. So, if you have a 40% equity stake in your property (meaning you require a 60% LTV mortgage) then you are likely to be offered the best rates by lenders. If your LTV is 75%, you will probably be offered a slightly less competitive deal and so on.

House price falls could see you move from one LTV band into another – meaning you risk having to pay more on your next mortgage. By making overpayments you could potentially offset house price falls, and save yourself money down the line.

However, unless you are on your lender’s SVR, you may be restricted from making overpayments. Check your mortgage document or call your lender to find out how much you are allowed to overpay each year, and whether any penalty charges apply.

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