Bank holds record low interest rate

The Bank of England refused to bow to pressure over surging inflation today (TIM IRELAND / PA )

The Bank of England refused to bow to pressure over surging inflation today as it held interest rates at their historic low of 0.5%.

The debate among the nine-strong Monetary Policy Committee (MPC) was likely to have been heated as new pressures on inflation emerged and recent voting evidence showed an increase in the number of policymakers backing a hike.

The borrowing rate was last changed in March 2009 but the CPI measure of inflation rose to 4% in January - well above the Bank's 2% medium-term target - and governor Mervyn King has warned it could hit 5%.

Furthermore, recent unrest in North Africa and the Middle East has driven up oil prices, which is expected to add further pressure to the cost of living.

Ian McCafferty, chief economic adviser at the CBI, said the no-change decision was unsurprising but an increase in rates was becoming more likely.

He said: "The short-term data continue to cloud the issue, but there are growing risks of inflation becoming more ingrained as firms attempt to bolster their profit margins and employees seek higher wage rises in the face of sharply-increased costs of energy and commodities.

"The shifting pattern of MPC voting suggests that these risks are an increasing concern, and we continue to believe that a move away from the emergency 0.5% rate set during the financial crisis is likely in the second quarter.

"By acting early, the Bank can keep inflation expectations under control, preventing the need for more aggressive action later on."

The committee was split four ways last month as Andrew Sentance voted for a greater hike than two of his hawkish colleagues. Voting patterns for this month's meeting will be revealed in two weeks.

The majority of the MPC said it was prepared to wait for further insight into the strength of economic recovery in the first quarter of this year. This follows shock figures which showed the UK economy declined by 0.6% in the final quarter of 2010.

Minutes of the MPC's February meeting showed some members who voted for no change in policy thought the case for a rate hike had "grown in strength".

Mr King, who has played down the prospect of a rate hike, has insisted temporary price shocks, including the price of oil, are pushing up inflation.

The MPC said Ben Broadbent, former economist at investment bank Goldman Sachs, will replace arch-hawk Mr Sentance in June.

Official figures on trade and manufacturing published this week suggest the economy returned to growth in January after the disruption caused by December's Arctic weather, adding weight to arguments that the recovery is robust enough to withstand a rise in interest rates.

Neil Prothero, economist at the Economist Intelligence Unit, said he continued to forecast a first rise in May to 0.75% after the publication of GDP figures for the first quarter on April 27.

He said: "The awkward trade-off between well above-target inflation and sluggish economic activity is set to persist for quite some time."

Graeme Leach, chief economist at the Institute of Directors (IoD), backed the Bank's decision to hold interest rates and said the economy was still too weak.

He said: "The IoD has argued for some time that it would be dangerous to raise interest rates when broad money supply growth is so weak. To do so would risk a double-dip recession."