Business

UK interest rates on hold at record low of 0.5%

A man walking past the Bank of England
Image caption Interest rates have been at 0.5% since March 2009

The Bank of England has held UK interest rates at a record low of 0.5% for the 19th consecutive month.

The Monetary Policy Committee's (MPC) decision had been expected, despite repeated calls from one member to raise rates to combat inflation.

The Bank also said it would not be expanding its £200bn quantitative easing (QE) programme.

Last month, another member of the MPC called for an increase in QE to boost the economic recovery.

The UK economy grew by 1.2% between April and June, but most economists expect growth to have slowed between July and September.

The National Institute of Economic and Social Research said on Thursday that it expected growth of 0.5% in the three months to the end of September.

The manufacturing sector has contributed to this expansion, with figures from the Office for National Statistics, also released on Thursday, showing that UK industrial production and manufacturing output both rose by 0.3% in August.

'Lively debate'

There are differences of opinion within the MPC about the best way to ensure sustained economic growth.

Minutes from last month's MPC meeting showed that Andrew Sentance had voted for an interest rate rise to combat inflation for a fourth straight month.

However, fellow MPC member Andrew Posen gave a speech last month in which he called for QE to be expanded. He argued that additional stimulus measures would be needed to secure the recovery.

QE is the Bank's policy of pumping money into the economy in order to increase the supply of money and stimulate demand.

Ian McCafferty, chief economic adviser to the CBI business group, said: "There is a lively debate between MPC members. Some fear that the weakness of the domestic economy will drive inflation well below target, thus requiring further monetary stimulus.

"Others think the medium-term inflation outlook is less benign owing to imported raw material costs and loosening inflation expectations. With the economy likely to be sluggish over the winter, this debate is unlikely to be resolved in the near term."

Consumer Prices Index (CPI) inflation is currently 3.1%, well above the government's 2% target rate. However, the Bank has stressed that it believes prices will start falling in the medium term.

It believes that keeping interest rates low to help stimulate demand to secure the recovery is a more pressing issue than high inflation.

'Persistent dangers'

Many economists are concerned that upcoming government spending cuts will undermine economic growth.

Some agree with Mr Posen that the Bank should pump more money into the economy.

"We still believe there are strong arguments for injecting additional QE, with VAT due to increase to 20% over the next few months and the fiscal austerity programme to be implemented more forcefully," said David Kern, chief economist at the British Chambers of Commerce.

"Persistent dangers of global setbacks and the huge pressures likely to face British business as the budget deficit is cut, make it important for the MPC to intensify its expansionary policies in the short-term."

Graham Leach, chief economist at the Institute of Directors, also argued that further stimulus measures should be introduced.

"Money supply growth is not strong enough to be confident of a sustained economic recovery.

"We need to see an established private sector recovery before the public sector recession begins. A further extension in quantitative easing before year end could help avoid that double-dip."

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