UK interest rates kept on hold at 0.5%

Image caption,
The Bank of England has kept rates low for 18 months

The Bank of England has voted to keep interest rates on hold at 0.5% amid concerns over the strength of the economic recovery.

The decision by the bank's Monetary Policy Committee (MPC) means rates will stay at their current record low for an 18th month.

It suggests the committee does not see high inflation as a serious concern.

Inflation is still well above the bank's target rate of 2% on the Consumer Prices Index (CPI) measure.

Last month CPI was at 3.2%, though it has been falling in recent months, and the bank expects inflation to fall to close to the 2% target this year.

The bank's programme of quantitative easing also remains on hold, but the option to pump more money into the economy remains open.

Last year, £200bn was injected into the economy by the bank in an effort to boost economic growth.

'Right decision'

Economists broadly welcomed the bank's decision, arguing that low interest rates were still needed to help the recovery in the economy, particularly with cuts in public sector spending expected to hit growth.

"While GDP growth in [the second quarter] was the strongest in four years, the data probably overstated the strength of economic activity," said Nida Ali, economic adviser to the Ernst & Young Item Club.

"And with significant fiscal tightening ahead, growth is likely to slow significantly.

"The MPC made the right decision," agreed David Kern, chief economist at the British Chambers of Commerce (BCC).

Image caption,
Rising prices are not a major concern for the MPC

"The tough deficit-reduction measures announced in the Budget, although necessary, will inevitably increase the threat of a UK economic setback.

"Given the precarious economic background, it is absolutely vital that the MPC maintains the current low level of interest rates until the second quarter of 2011 at the earliest."

Losing momentum?

The concern over the economy comes despite the strong 1.1% rise in GDP reported in the second quarter of the year.

More recent economic data has added to concerns that the recovery may be faltering.

On Wednesday, the latest purchasing managers' index report indicated that growth in the services sector had slowed to its lowest rate in more than a year in July.

David Noble, chief executive of the Chartered Institute of Purchasing and Supply (CIPS), which released the report, said the data "raised questions about whether the economic recovery is running out of steam".

There is also widespread agreement that inflation will not remain at its current high levels for more than a few months.

The sluggish recovery is expected to limit individuals' spending power, preventing prices from rising further.

A report by payments company VocaLink suggests that take-home pay rose by just 0.8% in July.

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