Interest rates 'will stay at 0.5pc until 2017'

Interest rates will stay at record lows for the next four years as the UK economy stutters out of recession, a leading bank has warned.

Citi said it expected the Bank of England to keep rates at 0.5pc until mid-2017.

The Bank of England cut interest rates to 0.5pc in March 2009, the lowest since the central bank was founded in 1694.

A possible eight years of low interest rates would be welcomed by borrowers but cause continuing difficulties for people who depend on interest on their savings .

Citi cut its 2013 growth forecast for the British economy to 0.4pc from 0.8pc and said it expected growth to remain weak at about 0.7pc in 2014.

It also predicted that the UK would lose its AAA rating this year.

In December, Standard & Poor's became the last of the three main ratings agencies to put Britain's top rating on a "negative outlook". It said its decision reflected the weak recovery and sharply rising national debt.

Citi predicted that the Bank of England would leave interest rates at 0.5pc until mid-2017 a year longer than expected.

Michael Saunders, chief UK economist at Citi, said in a research note: “The economy is likely to disappoint again in 2013, with little or no growth, sticky inflation and persistent deficits on both the current account and fiscal balance."

Ray Boulger, senior technical manager at John Charcol, said that Citi's interest rate forecast was "plausible".

"Even if [the rate] is not 0.5pc in 2017, it's not likely to be much higher," he said. "The state of the economy is such that even when it does go up, it will go up slowly.

"The market does expect the bank rate to stay low and that is reflected in the much lower morgage rates that we've seen in the past few months."

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