Interest rates left unchanged

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The Independent Online

Interest rates remained at a record low today as spiralling prices drew contrasting responses from policymakers in the UK and the rest of Europe.

The Bank of England's Monetary Policy Committee kept its base rate at 0.5% for the 25th month in a row after deciding that the UK's economy was still not strong enough to withstand the shock of higher borrowing costs.

Pressure for a rise has intensified after the CPI measure of inflation rose to 4.4% in February - double the Bank's 2% target - and as consumers' spending power is squeezed by rising fuel, food and commodity prices.

While the MPC left its emergency support package for the UK economy in place, the European Central Bank hiked rates for the first time since July 2008.

The ECB's base rate rose to 1.25% from its record low of 1% as it took a hard line against inflation, which hit 2.6% in March.

Inflation in the eurozone is much lower than the UK's and only marginally above the 2% target but the ECB acted over fears that the rising cost of oil and commodity prices could lead to higher wage demands, forcing the bloc into a vicious circle.

The MPC's lack of action has left it open to criticism that it has turned its back on savers whose nest eggs are being eroded by inflation and on families struggling to pay their bills.

Ros Altmann, director-general of Saga, said three in five pensioners wanted the Bank to raise interest rates to stop their savings being whittled away by inflation.

She said: "The Bank of England continues to ignore what most of us can plainly see - that inflation is starting to get dangerously out of control.

"The latest data show that there is no sign of inflation abating, and the MPC has bottled its chance to make a stand against rising prices once again.

"Savers need respite from spiralling costs, and they need it sooner rather than later."

The news will, however, benefit home-owners with tracker mortgages who will continue to see record low rates.

Policymakers have been reluctant to move on rates after a 0.5% decline in output in the final quarter of last year.

The OECD downgraded the UK's growth prospects in the second quarter to an annualised rate of 1% last week amid the impact of Government's austerity measures, which moved up a gear this week, and as the crisis in Libya boosts the price of oil.

Meanwhile, a string of gloomy updates from the retail sector continued with profit warnings from Carpetright and Halfords, as consumers tighten their belts.

The decision to keep rates on hold was welcomed by industry leaders, particularly as UK households have just seen their first drop in disposable income in 30 years after wages failed to keep pace with rising bills.

David Kern, chief economist at the British Chambers of Commerce, said: "Premature rate increases will have negative effects on growth and jobs.

"With wage increases remaining subdued, we strongly urge the MPC to hold its nerve and avoid taking any action that may risk derailing the recovery at a time when the Government is tightening fiscal policy through its deficit-cutting programme."

The Bank also kept its package of quantitative easing, designed to stimulate the economy, on hold at £200 billion.

The majority of policymakers expect inflation to peak at 5% before heading back to its 2% target next year.

Philip Shaw, chief economist at Investec, believes rates are unlikely to be put up until August.

The ECB's decision is likely to prove controversial after Portugal asked for a bail-out, expected to total 80 billion euros (£70 billion).

The decision will benefit strong economies, particularly Germany, but a rise in borrowing could harm the recovery in struggling economies such as Ireland and Greece.