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UK interest rates set to be held at 0.5% UK interest rates held at 0.5% by Bank of England
(about 3 hours later)
UK interest rates are expected to be held at 0.5% later, after a meeting of the Bank of England's rate-setters. The Bank of England's Monetary Policy Committee (MPC) has kept UK interest rates on hold at 0.5%, and unveiled no new quantitative easing (QE) measures.
Both decisions were expected, but the level of division will not be clear until the minutes of the meeting are released.
At the MPC's January meeting, there was a three-way split among its nine members.
At that meeting, two members voted for a rate rise, and one for more QE.
Recovery risk
Policymakers have been under pressure to consider raising rates from historic lows in a bid to rein back inflation.Policymakers have been under pressure to consider raising rates from historic lows in a bid to rein back inflation.
But data showing a surprise 0.5% contraction in UK GDP during the last three months of 2010 appeared to make an imminent rate rise less likely amid fears it would stifle a recovery. However, data showing a surprise 0.5% contraction in UK GDP during the last three months of 2010 appeared to make an imminent rate rise less likely amid fears it would stifle recovery.
At its last meeting, two of the bank's nine rate-setters backed a rate rise. The latest official inflation data showed that Consumer Prices Index (CPI) inflation rose to 3.7% in December, well above the target rate of 2%, led by price rises in food and fuel.
Tough choice
The Consumer Prices Index (CPI) measure of inflation has exceeded the Bank's 2% target by more than one percentage point for more than a year, and rose to 3.7% in December.
Last month, Bank England governor Mervyn King forecast that inflation could rise to 4-5% in the coming months because of higher food and fuel prices and a rise in VAT. However, he also added that inflation would fall back sharply in 2012.Last month, Bank England governor Mervyn King forecast that inflation could rise to 4-5% in the coming months because of higher food and fuel prices and a rise in VAT. However, he also added that inflation would fall back sharply in 2012.
So the Bank faces a difficult choice - either keep interest rates low to try to aid the economic recovery, or raise them to try to cool inflation.
Raising rates takes demand out of the economy and slows down inflation. But it also increases the cost of borrowing and there are concerns this may tip the economy back into recession.Raising rates takes demand out of the economy and slows down inflation. But it also increases the cost of borrowing and there are concerns this may tip the economy back into recession.
The British Retail Consortium (BRC) urged the Bank to hold its nerve, warning that a rise could damage the economic recovery. The Bank's key interest rate has been at 0.5% since March 2009.
"Raising rates at a time when consumer confidence is weak, the housing market is slowing and lending hasn't revived would only undermine a very uncertain recovery," said BRC director general Stephen Robertson. 'Turbulence'
"The economy needs all the support it can get, especially in the light of negative GDP figures. Raising rates prematurely will hamper the recovery and damage retailers ability to invest, grow and create jobs." Business group, the CBI said that while the decision was no surprise, it expected the bank to be considering rate rises from April onwards.
While the economy is seen as weak, recent figures from Markit/CIPS indicated that the manufacturing sector had seen record activity in January, while the construction and service sectors had returned to growth. Meanwhile the manufacturing group, EEF, welcomed the decision saying that while inflation was a concern, the recovery had "hit some turbulence in recent months".
"The monetary policy committee (MPC) is currently negotiating a tortuous path between high and rising CPI on one side and faltering economic activity and serious growth headwinds on the other," said Howard Archer, chief economist at IHS Global Insight. "The MPC is right to hold off on rate rises for now as an increase will do little to alter the path of inflation in the short term, which is being driven higher by commodity prices and tax," said the group's chief economist, Lee Hopley.
"The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth, the MPC should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track," she added.
A rise in rates would be welcomed by many savers who have seen low returns in the past couple of years.A rise in rates would be welcomed by many savers who have seen low returns in the past couple of years.
However, it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts.However, it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts.
Figures earlier this week from financial information service Moneyfacts suggested that average fixed-rate mortgages had been at their most expensive for six months at the start of February. However figures earlier this week from financial information service Moneyfacts suggested that mortgage rates for new borrowers and remortagers had already been rising.
It said that lenders were finding that the cost of raising money themselves had risen in recent months, and this increased cost was being passed on to customers. It said average fixed-rate mortgages had been at their most expensive for six months at the start of February.
Lenders were finding that the cost of raising money themselves had risen in recent months and this increased cost was being passed on to customers, Moneyfacts said.