Interest rates remain on hold

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The Independent Online

The Bank of England held interest rates at record lows today as policymakers weighed up the impact of a eurozone bailout and a hung Parliament.





The Bank's Monetary Policy Committee (MPC) voted to hold rates at 0.5% and left its £200 billion programme to boost the money supply unchanged.



The widely-expected decision came as European leaders agreed to prop up the euro and prevent Greece's sovereign debt crisis from spreading - while talks over a possible coalition continue following last week's indecisive election.



Despite worries over inflation, the current political and economic uncertainty will have reinforced the MPC's "no change" stance with the UK making a fragile recovery from recession.



Rate-setters have failed to budge policy since November and are unlikely to move until repair plans for the UK's public finances have been set out by a new Government and the economy shows signs of stronger growth.







The MPC is attempting to balance the unexpected stubbornness of above-target inflation with the need to support a still-weak UK economy.

According to official estimates, UK growth slowed to 0.2% in the first quarter of 2010 - but the MPC was unnerved last month by a bigger-than-expected rise in the benchmark Consumer Prices Index (CPI) in March to 3.4% - well above its 2% target.



The bank had expected CPI to fall back sharply later this year and in 2011 as VAT and energy effects fade and the vast amount of slack in the economy kicks in.



The committee had the details of the Bank's latest quarterly inflation report - to be published on Wednesday - to make their decision and economists will scour the document for any hints of a change of direction on rates and quantitative easing.



Fears of a longer-lasting spike in inflation could be further exacerbated by a recent rise in factory gate prices.



Producer output prices rose at their fastest pace in 18 months in April, which economists suggested was down to higher oil costs and firms taking advantage of a recent recovery in activity to boost profit margins.









Graeme Leach, chief economist at the Institute of Directors, said: "Given the political and fiscal uncertainty enveloping the country, and a mixed bag of evidence on the strength of the recovery, financial markets didn't need any surprises.

"It made sense to leave interest rates and quantitative easing unchanged."



Before the election, the Conservatives pledged to put forward an emergency Budget setting out the details of planned cuts to bring down borrowing.



The Tories are still in talks with the Liberal Democrats over a possible power-sharing arrangement, but both sides are agreed on the need to tackle the dire public finances.



Experts said interest rates could remain at their current record low for an extended period to compensate for the deficit-slashing plans of the new government.



ING Bank's James Knightley said: "The economy has returned to growth and inflation is above target, but the scale of fiscal policy tightening that the economy will experience over the next five years will be painful and should mean ultra-loose monetary policy remaining in place for a long time, possibly years."

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