Bank of England Governor Mervyn King believes interest rates in Britain will stay lower for longer than the markets expect to compensate for the fiscal pain ahead.
He is believed to have told senior American economist David Hale that the tax increases and spending cuts needed in the UK would be so unpopular they would keep the party that introduced them "out of power for a whole generation", the Times reports.
After the meeting with King, on March 11, Hale attended a drinks party and a breakfast meeting the following morning. Both gatherings were off the record but, according to people present, he also said King believed to compensate for the fiscal pain ahead, the Bank would need to keep interest rates extremely low.
The bank rate is currently at a record low of 0.5%. "The impression was that rates would stay low for the next four years," said one of those present. The Bank has confirmed King and Hale met but refused to say what they discussed.
The Bank will make its first post-election decision on rates on May 10 and publish its quarterly inflation report two days later. It is expected to push up its inflation forecast while retaining an optimistic stance on the recovery, with growth set to rise to 3% next year.
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