Interest rates won't rise for 15 months but we need to restrain over-eager homebuyers, say top forecasters

Building for the future: The Item forecast will reinforce Chancellor George Osborne's claims that he has engineered a sustainable recovery

Building for the future: The Item forecast will reinforce Chancellor George Osborne's claims that he has engineered a sustainable recovery

Workers and homeowners will get a double dose of good news tomorrow with a prediction that inflation and interest rates will remain low for at least a further 15 months.

The spring forecast from the highly regarded Item Club think-tank expects the economy to show ‘decent but unspectacular growth’ up until the end of the year.

But the group, whose regular economic research is sponsored by accountancy group EY, will warn that the City regulator, the Financial Conduct Authority, must use its powers to restrain over-enthusiastic homebuyers and stop them borrowing more than they can afford.

The report will predict that inflation will average 1.6 per cent in 2014 while wages will rise by an average of 1.7 per cent, bringing to an end a long period in which prices have risen faster than incomes.

The Item forecast will reinforce Chancellor George Osborne’s claims that he has engineered a sustainable recovery and it will help the Government to defend itself against Labour’s accusations that there is a ‘cost of living crisis’.

However, the report highlights a division between forecasters about the inflation risks. Earlier this month, economists at Legal & General warned that inflation could rise sharply in 2015. They called for interest rate rises to counter the threat.

But it will take several years of higher pay rises for real incomes to catch up with where they stood before the financial crisis and other economists have recently warned that inflation could pick up sooner than expected.

 

Low inflation will allow the Bank of England to keep interest rates at their historic low of 0.5 per cent for longer.

Most City economists are predicting a rise in interest rates either later this year or in early 2015. Item will forecast that no rise will be needed until the third quarter of next year.

Rises in interest rates can be used to dampen an overheating housing market, but Item is to recommend that the FCA should instead use its powers to limit the multiples of income that home buyers are allowed to borrow.

Peter Spencer, chief economic adviser to the Item Club, said the FCA’s powers to police mortgage lending would ‘head off problems when interest rates rise’.

In another boost for the Chancellor, the Item Club will brush aside suggestions that the Treasury’s controversial Help to Buy scheme is helping to fuel property price rises in the capital.


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