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Business News

Bank of England holds rates at record low

Rates held at 0.5% and £375 billion economy-boosting drive unchanged

The Bank of England kept interest rates on hold once more today amid renewed speculation that it may be forced to raise the cost of borrowing sooner than expected.

Policymakers maintained rates at their record low of 0.5% and kept the Bank's £375 billion economy-boosting drive unchanged.

But the strength of Britain's recovery is raising the prospect of a rate hike in 2015 - a year earlier than the Bank first predicted under its new forward guidance policy.

Experts believe the Bank will need to make significant revisions to its unemployment forecasts as UK growth gathers pace.

Calls are also growing among some economists to raise rates now in the face of surging growth and a buoyant housing market.

UK growth picked up to 0.8% in the third quarter and minutes of the Monetary Policy Committee's (MPC) October meeting showed unemployment was falling and the economy recovering faster than it forecast.

A hat-trick of positive industry surveys in recent days has added to the rosy economic picture, suggesting growth has continued into October across manufacturing, construction and services sectors.

Attention is already turning to the Bank's inflation report next week and expectations for governor Mark Carney's forward guidance to come under further pressure.

Under the Bank's rates pledge, it said it would not consider a rise until unemployment falls from 7.7% currently to 7% - a threshold it said would not be reached until the end of 2016 in its August inflation report.

Financial markets have remained unconvinced and are pencilling in a rise in early 2015.

Alan Clarke, economist at Scotiabank, said the Bank may now be forced to shift its own forecast by as much as 18 months as the recovery gains traction.

Think tank the National Institute of Economic and Social Research (NIESR) said earlier this week that rates could rise as soon as the second half of 2015 in a blow to Mr Carney's policy, after he sought to reassure households and businesses that rates will be on hold for at least three years.

But NIESR's latest forecast on the economy suggested a slight easing in growth to 0.7% in the three months to the end of October.

While most experts believe the Bank is right to hold rates until the recovery is firmly entrenched, some say rates should be raised by 0.25%.

Sir Steve Robson, the former second permanent secretary to the Treasury, and Andrew Sentance, senior economic adviser to PricewaterhouseCoopers and previously a member of the MPC, are among those who think rates should go up to 0.75% to start reining in ultra loose monetary policy.

The recovery prospects also mean the Bank's quantitative easing (QE) policy is set to remain on hold for some time.

America maintained its QE programme at full throttle last week, but the market fretted that comments in the Federal Reserve's statement suggested the door was left open to possible tapering in December or January.