Interest rate held ahead of budget

The Bank of England's Monetary Policy Committee (MPC) has pegged rates at a record low of 0.5 per cent and left its 200bn programme to boost the money supply unchanged.

The committee has not budged on policy since last November and will want to weigh up the impact of Chancellor George Osborne's emergency budget – due on June 22 – on inflation before making its next move.

The coalition has announced 6.2bn in spending cuts so far and rates may stay at record lows for longer to offset more of the likely pain ahead and prevent the UK sliding back into recession.

IHS Global Insight economist Howard Archer said: "The Government's plans will become a lot clearer in the emergency Budget and this will undoubtedly play a major role in the Bank of England's thinking on how monetary policy pans out over the coming months."

The MPC is having to weigh up a fragile UK recovery and current European turmoil against risking the return of inflation if rates stay low for too long.

The cost of living hit a 17-month high of 3.7 per cent in April, although Bank governor Mervyn King believes it will fall back to its 2 per cent target "within a year".