Low interest rates likely for medium-long term - experts

Today's decision by the Bank of England (BoE) heralds a period of low interest rates stretching into the medium to long-term, say experts.

Most analysts were unsurprised by the MPC's vote to keep interest rates at 0.5% and continue its programme of quantative easing (QE), which is on target to end in February.

The Bank has now held rates for 11 consecutive months.

Azad Zangana, European economist at Schroders, says: "The MPC remains frozen in wait-and-see mode by voting to hold interest rates today at 0.5%.

"Inflation is expected to rise sharply over the coming months as energy price base effects from last year unwind and the impact of VAT reinstated at 17.5% feeds through.

"Nevertheless, we agree with the Bank of England's view short-term inflationary pressures are temporary and we expect inflation to fall back towards the end of the year.

"With the UK's tendency to experience 'double-dip' recessions, the MPC is unlikely to raise interest rates until a sustained recovery is certain - possibly not until the fourth quarter of 2010."

Analysts at Legal & General (L&G) also expect the Bank to remain cautious well into 2010.

Ben Thompson, director of mortgages at L&G, echoes a general level of uncertainty within the industry: "We have never seen financial intervention and stimulus on this scale before and we don't know for sure how it will pan out for borrowers. The normal rules don't necessarily apply."

However, February, when the Bank's QE programme is due to come to an end, is being seen as a possible turning point.

William Dinning, head of strategy at Aegon Asset Management, says: "We do not expect the Bank to do anything new until February when it has digested its latest inflation report and can then make a decision on whether to renew its QE gilt-buying programme that expires at the end of this month.'

Edward Menashy, chief economist at Charles Stanley, agrees: "The current QE programme of £200bn is expected to be complete by February, so we can expect further information from the MPC when it announces in early February."

The Bank's decision to hold rates is bad news for savers, though.

Steve Folkard, head of pensions and savings policy, AXA, says: "Obviously the decision is not great for savers but any upwards move would only have been marginal, with minimal positive effect. The Bank is still very sensitive to the large numbers of people with debt, and they are higher on its agenda right now."