Interest rates set to stay on hold

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The Independent Online

The Bank of England will defy inflation and hold interest rates at a record low this week, amid signs that Britain's economic recovery is faltering.

The latest estimate of gross domestic product - showing a tepid 0.5% rise between January and March - revealed a slowdown in consumer spending and business investment, which analysts said raised concerns over domestic demand and the ability of the economy to withstand Government austerity measures.



Elsewhere, manufacturing and construction surveys have shown significant weakness and damaged prospects for decent growth in the second quarter of 2011.



Earlier in the year, the Bank's Monetary Policy Committee (MPC) had been expected to increase the cost of borrowing from 0.5% in order to rein in soaring inflation - which hit 4.5% in April, its highest level in two-and-a-half years.



This month also marks the first meeting without "arch-hawk" Andrew Sentance, who was the committee's biggest supporter of a rate rise before he left last month.



Howard Archer, chief UK economist at IHS Global Insight, expects the MPC to hold off lifting rates until November at the earliest.



He said: "Despite current elevated and rising consumer price inflation, there can be little doubt that the MPC will keep interest rates down at 0.5%, given the current softness of the economy, serious concerns over the consumer, and the fact that fiscal tightening increasingly kicked in from April."



The Bank, which will announce the result of its latest MPC meeting on Thursday, has said in recent months it believes inflation will rise above 5% later this year and remain above the Government's 2% target throughout 2012 before falling back in 2013.



Philip Shaw, chief economist at Investec, expects an interest rate hike in November and believes the MPC has been right to hold rates since March 2009.



He said: "This has been a very difficult period for the MPC to set the stance of monetary policy, but we firmly believe that the committee is doing the correct thing by keeping interest rates low."



He added: "While inflation has been above its 2% target for over 80% of the time over the past five years, one would be hard pressed to find many observers arguing that the economy would have been more rather than less stable had interest rates been pushed up to achieve the inflation target."

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