UK interest rates remain on hold at 0.5%

Bank of England
Image caption UK interest rates have now been held at 0.5% for more than two years

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

Economists had expected interest rates would remain unchanged due to the subdued economy. GDP figures for the second quarter showed growth of 0.2%.

A majority of economists polled by the BBC expect interest rates to remain unchanged until next year.

The Bank also kept its programme of quantitative easing at £200bn.

The decision came as no surprise to economists.

"Unchanged interest rates were always a nailed-on certainty", said Howard Archer, chief UK economist at IHS Global Insight.

'Inflationary inertia'

In the BBC survey of 32 forecasters, who are also regularly polled by the Treasury, 26 predicted that rates would not rise this year, and three predicted there would be no rate increase until 2013.

More than half expected the Bank rate to rise from its record low of 0.5% to at least 1.5% by the end of 2012.

The MPC's decision comes after the CPI measure of inflation fell to 4.2% in June, still well above the bank's 2% target.

Economists say rising prices do not necessarily mean the Bank has to raise rates.

"There is a certain amount of inflationary inertia in the UK. The Bank of England has explained it often in terms of one-off shocks, but at the end of the day these one-off shocks keep materialising, such as higher utility bills this year," said Sean Malony a bond strategist at Nomura.

Instead of raising rates some business leaders are calling for the bank to consider expanding its quantitative easing programme - designed to increase the amount of money available to companies.

"Every effort must be made to sustain the recovery. If the economy weakens further, the MPC should not hesitate to increase the QE programme," said David Kern, chief economist at the British Chambers of Commerce.

Growth forecast

The Bank of England will publish its latest growth and inflation forecast on 10 August and it is expected to lower its predictions for economic growth. Its last prediction for growth this year was 1.75%.

Both the CBI and the National Institute of Economic and Social Research have downgraded their own growth forecasts for 2011 to 1.3%.

The Office of Budget Responsibility has forecast growth of 1.7%, but on Thursday its chairman, Robert Chote, told the Independent newspaper that "there aren't many people" who now believe growth will meet that forecast.

Economic surveys released this week have painted a mixed picture of economic growth.

On Monday, a Markit/CIPS survey of the manufacturing sector showed the first contraction for two years in July.

However, a survey from the same source on Wednesday showed a surprise pick-up in the rate of growth in the service sector.

The Bank will also be monitoring developments in Europe and the US - the UK's largest export markets.

European stock markets have been falling on worries about the eurozone debt crisis and US economic growth.

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