ITEM Club sees little change ahead for interest rates

by Gill Montia

Story link: ITEM Club sees little change ahead for interest rates

A leading economic forecasting group is predicting that interest rates will remain low for the next 18 months.

The forecast, by Ernst & Young ITEM Club, is linked to a prediction that the UK economy will contract by 4.5% in 2009, marking the biggest single-year decline since 1945.

The Bank of England began its assault on the base rate last year, eventually paring it down to 0.5% in efforts soften the recession.

However, banks have not followed suit, arguing that they are reliant on higher interbank rates to fund their lending and at the same time raising margins to recoup losses from the credit crisis and bolster capital positions.

The Ernst & Young report also notes that “there is currently little sign of any extra lending to either companies or consumers”, despite the billions pumped into the UK banking system by the Government.

The Club points out that the Bank of England’s latest Credit Conditions Survey “suggests that 14% of lenders increased their lending to corporates in the second quarter of 2009, compared with 26% that were planning to do so three months earlier”.

With regard to the housing market, the study asserts that net lending remains “close to zero” with new mortgages largely financed by mortgage repayments and redemptions.

In a final note of gloom, the ITEM Club argues that Swine flu poses a serious threat to the UK economy and in a worst case scenario could cut a further 3% from GDP in 2009.