UK interest rates kept on hold at 0.5%

Simon Gompertz reports as the Bank of England announces that interest rates will remain at 0.5%.

UK interest rates have been kept at the record low of 0.5% again by the Bank of England's Monetary Policy Committee.

Economists had expected the decision, as recent data has underlined worries about the strength of the UK's recovery.

The decision comes despite the annual rate of inflation rising to 4.5% in April, up from 4% in March, and well above the Bank's 2% target.

It is the 27th straight month that the bank has left rates unchanged.

Meanwhile, the European Central Bank's president, Jean-Claude Trichet, has signalled that its interest rate could rise next month.

The ECB on Thursday held rates at 1.25%, but Mr Trichet said the bank would maintain "strong vigilance" on inflation - widely interpreted as a signal to the markets that rates will be raised at the next meeting.

James Knightley, economist at ING, said that continuing high UK inflation also made a rate rise by the MPC likely this year.

Start Quote

I would say... that it means that we are in a mode where there might be in the next meeting an increase of rates”

End Quote Jean-Claude Trichet President, European Central Bank

Poor UK economic data has led some economists to "push back expectations for the timing of the first UK rate hike to March next year", he said.

"However, with inflation likely to move above 5% in the next three to four months on the back of rising utility bills and food prices and with employment and employment intentions surveys remaining firm, we feel that the balance of probabilities favours an earlier move," he said.

Economists say policymakers face a difficult choice: keep rates on hold to help the economy, or raise them to cool inflation.

But higher rates increase the cost of borrowing, and there are concerns this may hurt the economic recovery.

Lee Hopley, chief economist at the EEF engineering employers' group, said weak UK growth and financial troubles in the eurozone meant it was "still too early for a rate rise".

Low returns

The record low Bank rate has led to relatively small returns for savers.

The latest statistics from the Bank of England show that, at the end of May, the average rate of interest with an instant access bank or building society account was 0.3%. This has been unchanged since a slight rise at the start of the year.

For cash Individual Savings Accounts, the average interest rate was 0.55%. Three years earlier, this had been 4.56%.

However, as long as the Bank rate is low, borrowers - especially those with variable rate mortgages - are seeing relatively low home loan repayments.

The BBC's Declan Curry looks at why interest rates matter


Although the Bank was expected to leave UK rates unchanged, some members of the MPC have been urging an increase.

At the MPC's meeting in May, policymakers voted six to three in favour of keeping rates on hold.

It was the fifth month in a row that three members had voted for a rise.

Former MPC member Andrew Sentance had persistently voted for rate rises, but stepped down last month and was replaced by Ben Broadbent.

Lee Hopley said it would be interesting to see if Mr Broadbent had shifted the balance of views when the MPC's minutes are published later this month.

Andrew Smith, chief economist at KPMG in the UK, said he thought there was a "stalemate" between those who wanted to raise rates to tackle inflation and those who feared it could stifle recovery.

He said he thought that the impasse was likely to continue for the rest of the year.

"With the fiscal squeeze now starting to bite and the chancellor emphatically ruling out a U-turn [on spending cuts to tackle the deficit], the prospects for the recovery will remain under a cloud, while on the Monetary Policy Committee's own forecasts inflation is yet to peak.

"It may well be 2012 before the stand-off is resolved," Mr Smith added.

The MPC did not reveal any new quantitative easing measures.

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