Financial News

  • 15 April 2014, 10:11

Interest Rates 'To Stay Low Until End Of 2015'

Interest rates are set to remain at low levels until the end of 2015, according to a new economic forecast.

Audit firm EY's independent forecasting group, the Item Club, expects the Bank of England to maintain the 0.5% base rate until the third quarter of next year..

It said "decent but unspectacular growth" in the intervening period - driven by growing consumer confidence - will allow the rate to be increased gradually in the fourth quarter of 2015.

The base rate has an impact on home loans and savings returns.

With the base rate staying at the historic low it expects house prices to rise by 7.4% this year and 7.2% next year.

But fears of a bubble can be eased by City regulator, the Financial Conduct Authority (FCA), it added.

New mortgage-lending rules, due to be brought in later this month to prevent homeowners overextending themselves, are expected to help ease price rises to 4.2% in 2016.

Peter Spencer, the Item Club's chief economic adviser, said: "The FCA will assume crucial importance to ensure (loan) multiples do not become too stretched and that affordability is scrupulously checked."

Fears have been voiced of overheating house prices, especially in the South and London.

"If these controls are rigorously applied this will eventually constrain London prices ? and head off problems when interest rates rise," said Mr Spencer.

The EY prediction comes alongside a forecast that incomes will overtake inflation this month for the first time in six years.

The club said average wage increases of 1.7% in 2014 will overtake the expected consumer price index (CPI) inflation rate of 1.6%.

"Until now the recovery has been financed by a fall in the amount households save, but it appears to be moving to a firmer footing," Mr Spencer continued.

"The consumer upturn will be given a boost from real wages and rising employment, while investment is finally kicking in."