Interest rates remain on hold

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The Independent Online

Bank of England rate-setters underlined their doubts over a strong recovery today as they maintained support for the economy at emergency levels.

The nine-strong Monetary Policy Committee (MPC) held interest rates at their record low 0.5% - where they have been since March 2009 - and left its programme to boost the money supply unchanged at £200 billion.

The committee was unswayed by the UK's rapid 1.1% advance in GDP estimated between April and June, with growth expected to fade in the second half of 2010 as the impact of Chancellor George Osborne's emergency Budget kicks in.

The Bank is keeping its foot firmly on the accelerator to compensate for the slower growth in prospects because of the savage cuts.

And Governor Mervyn King also stressed the uncertainty over the world economy and a recent tightening in credit conditions before the Treasury Select Committee last week.

He warned that policymakers could not be confident the recovery would be "sustained" and added that the debate was still "about the appropriate degree of stimulus, not about applying the brakes".

The doubts have overshadowed concerns about above-target inflation on the MPC so far.

Consumer Prices Index inflation has been above 3% throughout the year - well above the Bank's 2% target - and the Governor has warned that next January's VAT hike to 20% will keep the cost of living elevated throughout next year.

Inflation pressures - particularly on food prices - will also build through the rest of the year due to other factors such as the recent spike in wheat prices, pushing up bread costs.

The sole dissenter on the MPC so far is Andrew Sentance, who is likely to have voted for a rate rise for the third month in a row.

Mr Sentance believes the recovery is strong enough to withstand a gradual withdrawal of the emergency measures needed to tackle recession.

The Bank's committee had access to its latest forecasts - to be published next week - when making today's decision.

These will almost certainly show slowing growth as a result of the Budget, although Mr King has said the Budget plans did not make a "significant difference" to the chances of a double-dip recession.

Most experts predict that interest rates will stay on hold until well into next year before the Bank begins to tighten monetary policy.

British Chambers of Commerce chief economist David Kern said strong second-quarter growth "must not lead to complacency".

"The tough deficit-reduction measures announced in the Budget, although necessary, will inevitably increase the threat of a UK economic setback," he warned.

Lee Hopley, chief economist at the EEF manufacturers' organisation, added: "Growth prospects in the medium term at home and overseas suggest continued caution before policy begins to tighten."

Experts added that the Bank could yet decide to increase its efforts to boost the money supply if the recovery from a record recession looked like stalling.

IHS Global Insight's Howard Archer said: "There remains a very real possibility that the Bank could revive quantitative easing should the economy falter appreciably over the coming months.

"The Bank is clearly concerned about still-tight credit conditions."