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Bank claim: Interest rates could be frozen as BoE predicts inflation drop

Interest rates could remain at their current rate for the foreseeable future following the Bank of England's (BoE) prediction that inflation would drop within two years.

BoE governor Mervyn King claimed inflation would remain above the two per cent target until the end of 2011, driven largely by the planned rise in VAT this January.

However, Mr King did reveal that the Bank expects inflation to fall below two per cent within two years. This is significant as the Monetary Policy Committee (MPC), who set interest rates, will use the two year forecast in their deliberations.

Howard Archer, economist at IHS Global Insight, said: "It is abundantly clear that interest rates are set to remain very low for a considerable time to come, regardless of when they first start to rise.

"Monetary policy will need to remain loose for an extended period to offset the impact of the major, sustained fiscal squeeze."

The report estimates that the Consumer Prices Index will fall to around 1.5 per cent in 2012.

Last week, the MPC froze interest rates at their historically low level of 0.5 per cent for the 18th consecutive month.

Posted by Jennifer Haines

Jennifer's speciality knowledge is credit card changes and balance transfers. ADNFCR-2776-ID-800021996-ADNFCR

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