Interest rate remains unchanged

10 May 2010

The Bank of England has held interest rate at a record low of 0.5% for the 14th month in a row.

Its quantitative easing programme, which finished in February, was also left unchanged at £200 billion as the Bank remained in wait and see mode.

However, economists warn the UK's economy is far away from healthy and is vulnerable to relapses.

The headline rate of inflation hit 3.4% in March following the effects of higher oil and commodity prices, sterling's weakness and January's VAT hike.

However, the Monetary Policy Committee (MPC) believes this will fall back later in the year amid significant spare capacity and a drop off in these temporary factors.

More worrying is GDP growth in the first quarter coming in at a lowly 0.2% despite the recent pick-up in manufacturing and service sector data.

Combined with the ongoing political uncertainty resulting from the first hung parliament since 1974 and the eurozone debt crisis, MPC members remain cautious.

Howard Archer, chief UK and European economist at IHS Global Insight says interest rates are likely to stay low for months to come.

"This reflects our belief that the recovery will be bumpy and gradual overall. However, we acknowledge the chances of at least a token interest rate hike in the second half of the year have increased given the modestly more hawkish minutes of the April MPC meeting and the spike up in consumer price inflation to 3.4% in March.

"We still retain the view that whenever interest rates do start to rise, the increases are likely to be gradual and limited due to the need to offset the marked tightening in fiscal policy that will start in 2011 at the latest," he adds.

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