Bank rate held at record low

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The Independent Online

The Bank of England kept interest rates at their record low of 0.5% today despite warnings that inflation could rise to 5% in coming months.

The vote by the Bank's nine-strong committee is likely to have been finely balanced after pressure for higher rates intensified in recent weeks.

Policymakers last changed the borrowing rate in March 2009 but the CPI measure of inflation rose to 3.7% in December - well above the Bank's 2% medium-term target - and governor Mervyn King has warned it could hit 5%.

Business leaders applauded the Bank's decision and said any change in borrowing costs would jeopardise the UK's faltering recovery, particularly after economic output contracted by 0.5% in the final quarter of 2010.

With 68% of mortgage lending being at variable rates, the decision will also be welcomed by many homeowners, who continue to enjoy low levels of repayments.

The Bank's Monetary Policy Committee (MPC) also voted to keep its programme of quantitative easing, or money printing, unchanged at £200 billion to encourage growth.

Lee Hopley, an economist at manufacturing employers' organisation EEF, said an increase in rates would have done little to alter the path of inflation in the short term, which is being driven by higher commodity prices and taxes.

She said: "The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth, the Bank should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track."

The CBI business lobby group said it expected rates to rise in the second quarter of 2011 as inflationary pressures intensify.

CBI chief economic adviser Ian McCafferty said: "This announcement to keep rates the same is not a surprise, but with more MPC members showing their concerns about inflationary pressures, the Bank is in the process of shifting its stance.

"Looking beyond the recent surprising GDP data, the CBI still predicts growth in 2011, albeit modest, but recent indicators suggest that the inflation outlook has worsened.

"We expect the Bank to start preparing the ground for a gradual normalisation of monetary policy around the second quarter of the year."

Inflation is being driven higher by the increasing price of petrol, food, clothes, heating and the recent rise in VAT to 20% from 17.5%.

This is proving particularly painful for consumers because wages have failed to keep pace with the price rises.

The Bank will have had sight of its latest inflation report, which will not be made public until next week, and is expected to reveal further rises in costs.

Some economists argue that rates will be left on hold all year and that the threat from inflationary pressures has been exaggerated.

Mark Cliffe, ING chief economist, said food and energy prices are expected to peak later this year and import costs will be brought down as the pound rises in value.

Demand will remain under pressure because wage inflation will be kept down by high unemployment and the Government's austerity measures, he added.

Speculation about a rate rise was fuelled by last month's meeting when committee member Andrew Sentance, formerly a lone voice calling for a hike, was joined by Martin Weale, which meant just three more votes were needed to change policy.

Recent surveys suggest the economy returned to growth in January after the disruption caused by December's Arctic weather, adding weight to arguments that the recovery is robust enough to withstand a rise in interest rates.

The manufacturing sector showed record levels of activity in January, while the construction and service sectors returned to growth, according to Markit/CIPS reports.

Another month of low interest rates is bad news for savers whose funds are depleted by high inflation.

Ros Altmann, director general of Saga, whose over 50-year-old customers often rely on savings, said: "It's disappointing that the Bank of England has once again ignored the warning signs.

"With the UK economy showing every intention of shrugging off December's poor GDP figures, and with high and ever increasing inflation strengthening its already firm grip on the UK economy, the MPC has missed yet another opportunity to signal that it really is serious about controlling inflation, as well as giving savers at least some crumb of comfort that their suffering may be nearer an end."