Business

UK interest rates kept at record low of 0.5%

Bank of England
Image caption The decision to keep rates on hold had been widely expected

UK interest rates have been kept on hold at a record low of 0.5% by the Bank of England.

The Bank also decided not to pump any more money into the UK economy under its policy of quantitative easing (QE).

Interest rates have now been 0.5% since March 2009, and analysts do not expect any rate rises soon while the economy continues to recover.

The UK economy grew by 0.2% in the first three months of this year, slower than the previous quarter.

In the final three months of 2009, the economy grew by 0.4%.

However, the 0.2% is a first estimate, which could be revised up, or down.

The UK emerged from recession in the final quarter of last year, after six consecutive quarters of contraction.

Although the UK inflation rate rose sharply to 3.4% in March from 3% the month before, most analysts believe interests rates will remain at 0.5% for a number of months to bolster the fragile economic recovery.

Political uncertainty

"Given the dangers still facing the economy, the [Bank's] Monetary Policy Committee must persevere with expansionary policies," said David Kern, chief economist at the British Chambers of Commerce.

"Any thought of raising interest rates, and withdrawing the QE stimulus, must be rejected until there is more conclusive evidence that growth is secure."

The Institute of Directors said it "made sense" to keep rates on hold, particularly in light of the political uncertainty surrounding the formation of a new government.

Last week's UK general election failed to give any party a clear majority, and the major parties are holding talks to try to form a coalition government.

Image caption Credit card rates have gone up despite interest rates being stable

All parties have said they will cut spending to tackle the budget deficit, which means the Bank will have to keep rates low to stimulate growth, analysts say.

"I'm in no doubt that, whatever government is formed, a major fiscal squeeze looms and monetary policy will have to be kept exceptionally loose to compensate," said Roger Bootle, economic adviser to accountancy firm Deloitte.

Borrowing costs

The UK base rate has been at 0.5% since March 2009, but the cost of borrowing for the public has fluctuated since then.

Credit cards have become more expensive to use, with the average rate rising from 15.7% in March last year to 16.5% in March this year, as the recession has driven up the likelihood of borrowers defaulting.

The average cost of an overdraft has also risen, from 18.6% to 19%.

The cost of mortgage borrowing has been steadier.

Two-year fixed-rate mortgages, with a 25% deposit, rose from 4% last March to 4.5% last September, but have subsided gently since then to stand at 3.9% in March this year.

Borrowing at fixed rates for longer terms has become a bit more expensive though, with five-year fixed-rate mortgages with a 25% deposit jumping in June last year from 5% to 5.5% and hovering around that level ever since.

Standard variable rates for home loans have been much more stable and currently stand at 4%.

The ultra-low base rate has dragged down the interest payable on most people's savings.

The average cash ISA offers 0.5% - the same as base rate itself - while branch-based instant access accounts offer even less - just 0.2%.

However, the competition among banks and building societies to attract some saver's money has contrived to push back up the interest rates on offer to people whose branch accounts require some notice before a withdrawal.

They have gone up from 0.2% to 0.5%.