Interest rates stay at record low

The Bank of England kept interest rates at a record 0.5% today but stopped short of taking emergency action to kick-start the faltering UK economy.

Fears the UK is facing a double-dip recession have fuelled expectations that the Bank's Monetary Policy Committee (MPC) will extend its £200 billion quantitative easing (QE) programme - effectively printing more cash.

Business leaders and economists say there are strong arguments in favour of upping the QE stock, but accept action is unlikely until later in the year.

Such a move would be a high-risk strategy because it could fuel inflation, which is well above target at 4.4%, and put more pressure on household budgets.

Soft manufacturing growth, a contraction in the powerhouse services sector and increased global uncertainty - reflected in recent stock market turmoil - have prompted a raft of forecasters to slash economic predictions.

The OECD warned today it fears the world economy is close to grinding to a halt as increased uncertainty hampers growth. Its central forecast for the UK in the final quarter of 2011 is for annualised GDP growth of just 0.3%, compared with 2.5% growth last autumn.

And Chancellor George Osborne this week signalled that GDP forecasts were set to be downgraded in his autumn statement on November 29.

However, he insisted that the Government would stick to its deficit reduction plan, which he described as "the rock of stability upon which any sustainable recovery depends".

The British Chambers of Commerce (BCC), which recently downgraded the UK's growth prospects, said the MPC needed to boost business confidence.

BCC chief economist David Kern said: "The MPC must keep interest rates as low as possible for as long as possible, and will have to start thinking about an early injection of additional QE."

Ian McCafferty, the CBI's chief economic adviser, said it was still too early to be certain that more policy action was required from the Bank.

He added: "We hope the UK economy will be on a firmer footing by next year, when a lower inflation rate will bring some relief for households. However, the global downside risks remain acute, so the Bank must continue to monitor global developments very closely and be prepared to be flexible."

MPC member Adam Posen has been the Bank's lone voice in calling for more QE but minutes of last month's meeting showed other members were now considering the option. Two members also dropped calls for higher borrowing costs.

Holding interest rates will be welcomed by borrowers, with the price of a fixed rate mortgage now at an all-time low as lenders factor in a longer spell with the Bank's base rate at rock-bottom.

However, the extended period of lower lending costs spells more misery for pensioners and savers, who will continue to suffer low returns on their money at a time when high inflation is eroding the value of their deposits.

Elsewhere, the European Central Bank (ECB) left its key interest rate unchanged at 1.5% as uncertainty grew over the eurozone's economic outlook.

The ECB hiked rates for the first time since July 2008 in April to 1.25% before lifting them again to 1.5% in July, as it took a hard line against inflation, which hit 2.6% in March.

But increasing concerns about the eurozone debt crisis - including fears Italy and Spain will follow the like of Greece, Ireland and Portugal and require an EU bailout - have now raised the prospect that the ECB acted prematurely and could even reduce rates.

Carsten Brzeski, economist at ING, said: "For the time being, a rate cut still seems to be one bridge too far for the ECB. However, a further worsening of the economy and deflationary tendencies could force the ECB's hands to act."

In the UK, economists said quantitative easing is still looking increasingly likely after rates were held for the 30th month in a row.

Scott Corfe, economist at thinktank CEBR, said: "An expansion in QE - effectively a loosening in monetary policy - looks increasingly likely in both the UK and the US, despite arguments that it is unlikely to solve the current economic malaise and its effects on the real economy are still unclear.

"Unfortunately, it is the only straightforward measure policymakers have left in the short term. The West is in for a long, hard slog of a recovery."

PA