Cost of finance to fall as interest rates predicted to stay low

Interest rates could stay at 0.5% until 2011 and not reach 2% until 2014, an influential think tank has forecast.

The Centre for Economics and Business Research (CEBR) has said that tax rises and spending cuts will limit economic growth, forcing the Bank of England (BoE) to maintain low rates in order to stimulate borrowing and spending.

Douglas McWilliams, CEBR chief executive, said that the UK was likely to see an "exciting policy mix" with the "fiscal lever being pulled back while the monetary lever is pushed forward".

The forecast comes after the BoE kept interest rates at a historical low of 0.5% for the seventh month amid continuing pressure on businesses seeking to borrow money.

Mark Halstead, Red Flag director at Begbies Traynor, said that the low interest rates would ultimately result in lower borrowing rates for businesses.

"I expect banks to start fighting for good deals next year and that will help the middle tier businesses that are struggling to get finance," he said.

"There is still no real liquidity in the markets, however lots of secondary and tertiary lenders are becoming more open to propositions. The money is trickling down but there is no avalanche and we need that avalanche."