Interest rates held at record low

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The Independent Online

The Bank of England kept interest rates at their record low today despite rising inflation squeezing households' spending power.

Inflation has soared to 4.5% in recent months - more than double the Bank's 2% target - driven higher by the rising cost of essential items such as food and fuel.

But the Bank's Monetary Policy Committee (MPC) voted to keep rates at 0.5% for the 28th month in a row, even though a hike could help to bring inflation down back towards its target.

The Bank also held its quantitative easing programme at £200 billion.

MPC members have been concerned about the strength of the economic recovery in recent months and more signs of a slowdown have emerged since its last meeting a month ago.

Recent surveys have revealed that growth in the manufacturing and the services sectors have slowed since the first quarter of 2011.

There has also been increasing evidence of a slowdown in consumer spending after retailers including homeware chain Habitat, department store TJ Hughes and fashion outlet Jane Norman collapsed into administration.

Many economists now do not expect a rates rise until next year.

But at the same time there are signs that the cost of living continues to rise, which spells trouble for cash-strapped families whose income is failing to keep pace with rising prices.

Scottish Power will raise gas and electricity prices by 19% and 10% respectively next month and other energy suppliers are expected to follow.

The British Retail Consortium said food prices rose 5.7% in June - the highest rate for two-and-a-half years.

Borrowers are seeing the benefits of expectations that it will be some months before rates rise, with the average cost of a two-year fixed-rate mortgage falling recently to an all-time low of 4.31%, following a drop in swap rates, upon which the deals are partially based.

But the delay is unwelcome for savers, who will continue to suffer from low returns on their money at a time when high inflation is eroding the value of deposits.

The bank has warned that inflation will rise above 5% later this year and remain above target throughout 2012, before falling back in 2013.

CBI chief economic adviser Ian McCafferty said: "Mixed messages from recent data leave the MPC in a difficult position.

"But with inflation likely to rise to 5% by the autumn, and the economy still gradually recovering, a shift in policy should not be ruled out before the end of the year."

David Kern, chief economist at the British Chambers of Commerce, said businesses were in support of today's decision to leave interest rates unchanged.

He said: "With UK inflation at 4.5%, and set to increase further in the next few months, the MPC is naturally concerned. But tightening policy in reaction to higher utility prices and internationally generated inflation would be a major mistake.

"Premature rate increases, at a time when the Government is tightening fiscal policy through its deficit-cutting programme, could damage jobs and growth and should be avoided."

He said the MPC should consider more quantitative easing if the economy weakens further.

But Ros Altmann, director-general of Saga, said the Bank had not responded adequately to the "serious inflation threats".

She said: "In a week when so much attention has been focused on the need for people to save for their retirement - and their potential care needs in later life - the failure today to demonstrate an understanding of the dangers of punishing prudence is deeply troubling.

"When will the pressure ease off and savers and pensioners living on fixed incomes receive some relief?"

Meanwhile, the European Central Bank increased the interest rate in eurozone countries by 0.25% to 1.5% as it took a hard line on inflation.

Economists said the higher rates will cause problems for some of the struggling eurozone economies such as Portugal and Greece which are in need of stimulus to promote growth.