'Interest rates should remain at 0.5% until 2014'

Interest rates will have to stay at their record low level until 2014 as Government austerity measures hit growth, economic experts warned today.

The Ernst & Young Item Club, which uses the same forecasting model as the Treasury, has also cut its forecasts for UK growth for the next three years.

The research group now believes that the economy will grow by 1% this year, as the recovery remains "slow" and "patchy".

Gross domestic product growth will then rise to 2.2% next year, compared with its earlier forecasts of 2.7%, and remain just below 3% for the following two years.

Experts say that the Bank of England's policymakers will need to keep the benchmark at 0.5% to balance out government spending cuts and offset the effect of the eurozone's sovereign debt crisis on demand for British exports.

Its interest rates forecast is in stark contrast with predictions by the Office for Budget Responsibility, which has said that it expects the rates to begin to rise next year, hitting 3% by 2014.

Rates have been held at 0.5% since March 2009, the lowest in the Bank of England's history.

The Item Club also warned that inflation will remain above the Bank's target until the end of 2011, thanks to high energy prices and the impending VAT hike.

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