UK interest rates maintained at record low of 0.5%

Bank of England
Image caption Interest rates have been at 0.5% since March 2009

The Bank of England has kept UK interest rates on hold at a record low of 0.5% for the 16th consecutive month.

The Bank's Monetary Policy Committee (MPC) also decided not to inject any more money into the economy under its policy of quantitative easing (QE).

The decision had been expected but calls have been growing for an increase in rates to curb inflation.

Separately, a leading think tank warned that the UK recovery faced "headwinds" in the wake of last month's Budget.

The National Institute of Economic and Social Research (Niesr) estimated that the economy grew by 0.7% in the three months to the end of June, marking a slowdown from the 0.9% expansion seen in the three months to May.

Official gross domestic product (GDP) figures for the second quarter will be released on 23 July.

Inflation concerns

Last month, MPC member Andrew Sentance voted to raise rates to 0.75%, becoming the first committee member to call for a rise since August 2008.

Mr Sentance had argued that a rise was needed to bring down inflation.

The Consumer Prices Index (CPI) hit a 17-month high of 3.7% in April. It fell back to 3.4% in May but remains well above the Bank's 2% target.

The minutes of July's meeting, which will reveal how MPC members voted, will be released in two weeks' time.

The British Chambers of Commerce said it "fully supported" the Bank's decision, while the manufacturers' organisation, the EEF, said the decision was expected and "likely to be maintained in the short term".

"However, the planned VAT rise will place additional pressure on already elevated inflation expectations and next month's Inflation Report will need to consider the risks of relying on spare capacity in the economy to bring down inflation and expectations," said Lee Hopley, the EEF's chief economist.

VAT is scheduled to rise from 17.5% to 20% on 4 January, 2011.

Cost of housing

Ray Boulger, of mortgage brokers John Charcol, said he did not expect to see an increase in interest rates until next year and even then, expected them to "only rise slowly".

He added that, in terms of mortgages, "lifetime trackers still offer better value for the time being".

Meanwhile, separate research from the Halifax found that the cost of owning and running a home in the UK had fallen by 6% over the past two years, driven by a decline in mortgage payments.

The average mortgage rate paid by existing borrowers fell from 5.8% in April 2008 to 3.67% in April 2010, the Halifax said.

Growth risk

The Niesr report warned that the UK risked faltering growth for the rest of this year.

"Further acceleration in GDP growth would start to reverse the rise in unemployment seen over the recession. Unfortunately, the UK economy does face headwinds," Niesr said.

"Fiscal consolidation both in the UK and the euro area will restrict growth in the short-term and there is clearly a risk that this rate of growth will not be maintained through the rest of this year."

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