Given the negative economic effect of spending cuts being pushed in the UK, expect monetary policy to be extremely stimulative as a counter-balance.
This means one hundred billion pounds of additional bond buying from the central bank, and no interest rate hike until ‘late 2012’.
Yet even this may not be enough to stave off an economic contraction:
“We expect the authorities to push the monetary policy levers hard in the opposite direction to the fiscal policy levers,” the CEBR said in the statement.
The CEBR’s forecast for economic growth in the first three months of 2011 is 0.1 per cent, which implies there is almost a 50 per cent chance the economy will contract during the quarter, according to the report.