UK interest rates kept at record low of 0.5%

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.

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

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