Interest rate unlikely to rise anytime soon

Interest rates

The official rate of interest is unlikely to increase from its current level of 0.5% in the near future, the head of the Bank of England has hinted.

Speaking in front of the Treasury Select Committee, Bank of England governor, Mervyn King, said he was "more uncertain than ever" about the UK economy - with the green shoots providing a very mixed picture.

He said: "I feel more uncertain now than ever, because it's not a pattern of a recession coming into recovery that we've seen since the 1930s. There are genuine concerns about how quickly the recovery will pick up - looking at the clear evidence, [firms] are finding it hard to access credit from the banking system."

King also indicated that the base rate is unlikely to be raised in the near future.

He told MPs that he did not believe that "the big picture" had changed since the Bank of England's May inflation report. This puts headline inflation at just below the 2% medium term target if the base rate remains at 0.5% over the next two years and quantitative easing (the creation of new money) totals £125 billion as currently planned.

"If you withdraw stimulus too quickly, you run the risk that the downturn will resume," he explained. "Equally of course, we need to be very careful not to allow the stimulus to reach the point at which inflation takes off."

Howard Archer, chief UK and European economist at IHS Global Insight, says: "The comments by Mervin King broadly reinforce the view that the base rate is highly likely to stay at 0.5% through the rest of 2009 and may well continue at that level well into 2010.

"In addition, the Monetary Policy Committee (MPC) appears to be keeping an open mind on whether the Bank of England will need to further increase the amount that it is spending on quantitative easing."

Trouble ahead?

King also set himself on a collision course with Gordon Brown after criticising the government's fiscal policy.

"We are confronted with a situation where the scale of deficits is truly extraordinary," he told MPs. "This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path that wasn't sustainable and a correction was needed."

He called for the chancellor Alistair Darling to cut the budget deficit under the course of a single parliament.

In April's Budget, Darling said the government's current account deficit would come down to 5.5% by 2013-2014.

"There will certainly need to be a plan for the lifetime of the next parliament, contingent on the state of the economy, to show how those deficits will be brought down, if the economy recovers, to reach levels of deficits below those which were shown in the budget figures," King said.