Interest rates to remain at record low

Interest rates were kept at their record low yesterday after Bank of England policymakers resisted pressure to curb rising inflation.

The no-change decision, which means the Bank’s base rate has been at 0.5 per cent for 25 months, comes amid further signs that the UK’s economic recovery is still not strong enough to withstand the shock of higher borrowing costs.

A string of gloomy updates from the retail sector continued today with profit warnings from Carpetright and Halfords, as consumers tighten their belts in the face of economic uncertainty and higher prices, particularly for fuel.

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But with inflation running at 4.4 per cent, the Bank of England risks damaging its credibility by failing to take action over price pressures.

Three members of the nine-strong monetary policy committee voted to increase rates last month but the majority of policymakers expect inflation to peak at five per cent before heading back to its two per cent target next year.

Analysts think there is a much greater chance that interest rates will rise next month as members will have access to the Bank’s latest economic forecasts.

Policymakers have been reluctant to move on rates after a 0.5 per cent decline in output in the final quarter of last year.

The OECD downgraded the UK’s growth prospects in the second quarter to an annualised rate of one per cent last week amid the impact of Government’s austerity measures and as the crisis in Libya boosted the price of oil.