Budget hits savers as interest rates set to stay low for longer

The debate on how today's spending cuts and tax rises will affect UK economic growth rages on but most economists and market analysts now agree that interest rate hikes are unlikely for months, maybe years to come.

That may be good news for borrowers facing rising VAT hikes and higher national insurance contributions and for business hoping to grow despite the downturn, but it is bad news for savers.

Douglas McWilliams, chief executive at the centre for economics and business research:

‘We are much more bearish about the economy than the Office for Budget Responsibility and expect growth in the next three years to average 1½ % rather than their 2¼%.

‘The Chancellor noted Mervyn King’s remark at the Mansion House dinner last week that if growth was slower interest rates would be lower.

‘We agree and – with our lower growth forecast we now think that base rates will be stable at 0.5% until the end of 2012.’

Duncan Higgins, senior analyst at Caxton FX:

‘The rise in VAT was perhaps the headline announcement. 

‘The rise will not come until January 2011, but the market will note the potential impact on inflation. For the time being the spending cuts will allow the Bank of England to maintain a loose monetary policy. However, the Bank is unlikely to wait for the inflationary pressures to kick in before acting to prevent any sharp rise.’

Joshua Raymond market strategist at City index:

‘One further benefit of the delayed hike in VAT will be the fact that it should come into effect at a time when Inflation is expected to have reduced and this will calm some of the market fears that Interest rates may have to rise sooner than expected to curb high inflation.’

Howard Archer, UK economist at IHS Global Insight: