Bank set to keep interest rates at all-time low

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Rate-setters will mark a year of rock-bottom interest rates and efforts to boost the money supply tomorrow by maintaining their support for a fragile UK recovery.

The Bank of England's Monetary Policy Committee (MPC) is set to keep its quantitative easing (QE) programme unchanged at £200 billion at its latest policy meeting and hold interest rates at their 0.5% all-time low.

The "wait and see" stance comes after a month of mixed signals for the MPC as the UK crawls out of recession.

Figures have shown the UK growing at a faster pace than first thought - but the 0.3% advance seen in the last quarter of 2009 offers scant cause for celebration as the recession was deeper than first thought.

Recent surveys showed manufacturing and services activity picking up pace and consumer confidence at its highest level for two years, but VAT hikes and snow have hit retailers, and house prices also registered their first fall in nearly a year during February.

The MPC's inflation-watchers will also be focusing on the current weakness of the pound amid fears over a hung parliament delaying plans to tackle the UK's deficit.

The pound fell to a 10-month low against the dollar on Monday and has slumped by around 8% so far this year.

Members of the MPC have meanwhile dropped hints that more QE could be in the offing if the recovery fails to gain traction.

The impact of temporary VAT cuts, car scrappage schemes and spending brought forward to beat recession are set to fade, while the dire public finances mean there will be little scope for further giveaways.

The Bank lowered its growth forecasts in the February inflation report, when the Governor said the economy was still "bumping along the bottom".

IHS Global Insight economist Howard Archer said: "We expect the Bank of England to keep interest rates down at 0.5% not only on Thursday but through 2010 given likely persistent concerns about the strength and sustainability of the recovery.

"It is likely that the economy will go through many more twists and turns over the coming months."

The MPC is unlikely to make any rash policy moves to tackle a short-term inflation spike, with the Consumer Prices Index (CPI) currently well above target at 3.5% thanks to the VAT rise and higher petrol bills.

The Bank expects CPI to drop well below its 2% target over the longer term, as the huge slack created by what is now the deepest recession since official records began drives down prices.