Interest rates held at record low as forecasts remain gloomy

Just two months ago, commentators were predicting that policymakers would increase the Bank’s base rate at this month’s meeting due to fears over mounting inflationary pressures.

But the Bank’s monetary policy committee (MPC) kept rates at 0.5% today after a spate of gloomy economic indicators, including lacklustre figures which showed growth in the UK had been flat for six months.

In addition, the rate of inflation unexpectedly slowed in April to 4% which, while still double the Government’s target, eased pressure on the MPC to act.

Elsewhere, a survey today revealed a further slowdown in growth in the powerhouse services sector, while a leading thinktank, the National Institute of Economic and Social Research (Niesr), warned that growth would continue to be weak.

Economists believe the latest set of gross domestic product (GDP) figures last week - which showed a tepid 0.5% rise between January and March - killed off any chance of an interest rate hike today.

The Bank also left the scale of its quantitative easing programme to boost the money supply unchanged at £200 billion.

Ian McCafferty, the CBI’s chief economic adviser, said the MPC’s decision to hold rates was “not surprising”.

He said: “While the recovery continues to make progress, recent economic data show that it is very patchy across sectors, and some parts of the economy remain fragile.

“However, pipeline inflationary pressures have intensified, with our economic surveys showing rapid cost inflation from increased energy and commodity prices.

“Our view remains that the Bank is likely to move away from the emergency 0.5% rate later this year.”

Today’s meeting was the last for MPC member Andrew Sentance, who has led calls for a rate rise by voting for a 0.5% increase to 1%.

David Kern, chief economist at the British Chambers of Commerce (BCC), said the MPC was right to hold its nerve.

He said: “The latest figures suggest growth has been relatively flat over the past six months, with data this week indicating that the rate of recovery in the manufacturing, construction and service sectors has slowed.

“In this environment, maintaining low interest rates is essential to allow businesses to grow, create jobs and contribute to an economic recovery.”

The UK economy faces further headwinds as the impact of the Government’s tough austerity measures - including £81 billion of spending cuts - kick in.

Howard Archer, chief UK economist at IHS Global Insight, said the MPC’s no-change decision reflects current serious concerns and uncertainties over the state of the economy.

Mr Archer said he expected the Bank to lift rates from 0.5% to 0.75% in November and added: “Monetary policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze.

“In addition, we do believe that inflation will fall back markedly later on in 2011 and 2012 as relatively modest, below-trend growth and elevated unemployment limits underlying inflationary pressures.”

The MPC will have had sight of the latest quarterly Bank of England forecasts, which are due out next Wednesday and offer predictions on GDP and inflation.

The Bank is expected to downgrade its growth forecasts for the year after a slew of disappointing data.

A Markit/CIPS survey, where a reading of above 50 indicates growth, showed activity in the services sector slowed to 54.3 in April from 57.1 the previous month, the second largest fall since October 2008.