The Bank of England

The Bank of England will have to keep interest rates at their record low of 0.5% until 2014, a leading economic forecaster has said.

The Ernst & Young Item Club said rates would need to be kept low to counter-balance the government's spending cuts.

"A base rate of 0.5% will begin to look like the new normal," Professor Peter Spencer from the Item Club said.

The Office for Budget Responsibility (OBR) has said that it expects rates to start to rise next year.

Interest rates have stood at 0.5% since March 2009.

"The new coalition's plans to cut the deficit are certainly ambitious," said Prof Spencer.

"On the assumption that the government is able to implement the overall reduction of £40bn set out in the Budget, we expect that UK growth will struggle to reach 1% this year but will gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment."

The Item Club believes the Consumer Prices Index (CPI) measure of inflation will stay above the Bank of England's 2% target over the next 18 months, helped by high energy prices and increases in VAT.

But it says inflation will then fall "well below 2% as these effects wear off and spare capacity bears down on pricing decisions and wage bargaining".

"To prevent CPI inflation moving below 1% it will be necessary keep the Bank base rate low at 0.5% for much longer than the OBR and the markets have anticipated," Item said.

The Bank of England has voted to keep interest rates on hold at 0.5% amid concerns over the strength of the economic recovery.

The decision by the bank's Monetary Policy Committee (MPC) means rates will stay at their current record low for an 18th month.

The Bank's programme of quantitative easing also remains on hold.

Inflation is still well above the bank's target rate of 2% on the Consumer Prices Index (CPI) measure.

Last month CPI was at 3.2%, though it has been falling in recent months, and the Bank expects inflation to fall to close to the 2% target this year.

Economists broadly welcomed the Bank's decision, arguing that low interest rates were still needed to aid the recovery in the economy, particularly with cuts in public sector spending expected to hit growth.

"The MPC made the right decision," said David Kern, chief economist at the British Chambers of Commerce (BCC).

"The tough deficit-reduction measures announced in the Budget, although necessary, will inevitably increase the threat of a UK economic setback.

"Given the precarious economic background, it is absolutely vital that the MPC maintains the current low level of interest rates until the second quarter of 2011 at the earliest."

Recent economic data has cast further doubt over the strength of UK economy.

On Wednesday, the latest purchasing managers' index indicated that growth in the services sector had slowed to its lowest rate in more than a year.

A member of the Bank of England's Monetary Policy Committee (MPC) has voted again for a rise in interest rates.

Minutes from the MPC's August meeting show Andrew Sentance voted to raise the Bank rate to 0.75% from the record low of 0.5%, citing high inflation.

It is the third month in a row that Mr Sentance has called for a rate rise.

The other MPC members at the meeting all voted for rates to be held at 0.5% for the 17th month in a row.

They also voted not to pump any more money into the economy under the programme known as quantitative easing (QE), but said they were ready to do so should conditions require it.

Central banks may have to provide more economic support amid a fragile global recovery, the deputy governor of the Bank of England has warned.

Charles Bean said policymakers had prevented a financial market collapse but further action might be required.

He was speaking at the Economic Policy Symposium in Jackson Hole, Wyoming.

At the same event, US Federal Reserve chief Ben Bernanke set out "unconventional" policy options to boost the US economy.

The event, which attracts leading central bank figures, is this year focused on monetary policy lessons from the recent crisis.

Presenting a report to the conference, Mr Bean said that the Bank of England had been unable to prevent the crisis because its powers - primarily the setting of interest rates - were not powerful enough.

He also hinted that there may be a need to increase so-called quantitative easing - the pumping of new money into the economy.

"The deleveraging process is incomplete, the recovery remains fragile and a considerable margin of spare capacity is yet to be worked off, while further policy action may yet be necessary to keep the recovery on track," he said.

Mr Bean also said that government purchase of securities - such as bonds and shares - was an effective way for central banks to ease financial conditions in a crisis.

However, he insisted that adjustments to interest rates should be used in normal times, with asset purchases "best kept in the locker marked For Emergency Use Only,"

Later this year, the coalition government will unveil details of new powers for the Bank to try and head off any future crisis.

And Mr Bean used his speech to set out examples how these could underpin "macro-prudential policy" under the Financial Regulations Bill.

These included forcing banks to build up reserves in good times to help them weather downturns, and imposing restrictions on how much money mortgage lenders would provide.

"With an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem," he said.

"That is what macro-prudential policy is all about."

Mr Bean's speech came after data showed that the UK economy grew by more than initially thought in the second quarter of 2010, boosted by a strong performance by the construction sector.

The economy grew by 1.2% in the quarter, the Office for National Statistics (ONS) said, revising up its initial estimate of 1.1% growth.

That was the fastest rate of quarterly expansion recorded since the first three months of 2001.

But most economists do not expect this level of growth to continue.

Meanwhile, the US Commerce Department revised down its growth estimate for the second quarter.

It now says the US economy grew at an annual rate of 1.6%, down from its first estimate of 2.4%.

Of the policy options set out by Mr Bernanke, top of the list is more quantitative easing.