Interest rates remain at 0.5%

10 February 2011

The Bank of England (BoE) has kept the base rate on hold at 0.5%, with no new quantitative easing measures announced.

Both decisions were highly anticipated, and recent data showing a 0.5% contraction in UK growth during the last three months of 2010 made a rise even less likely.

The Monetary Policy Committee (MPC) decision to keep the rate the same for the 23rd consecutive month came despite speculation members would vote for a rise.

MPC member Dr Andrew Sentance has been arguing the need for a rate rise since June 2010 and at the last meeting in January he was not alone.

Read: Will interest rates rise in 2011?

His views have been backed by Charles Bean, deputy governor of the BoE, who says the increase in the cost of fuel and food could cause inflation to rise further and argues this would need to be curbed using monetary policy.

The main issue is inflation. When interest rates rise it encourages people to save and discourages them from borrowing because they get a better rate of return of their savings and their borrowing costs more.

This has the effect of taking money out of the economy, as people spend less and reduces demand which should push down the cost of goods.

More more read: Rising inflation: What does it mean for you?

However, David Kern, chief economist at the British Chambers of Commerce, argues the economy is still too fragile to handle a rate rise.

He says while figures from the Purchasing Managers' Index showed businesses rebounded well following the disruption caused by the snow in December, the MPC should not be too hasty.

"We are concerned that recent positive figures could heighten pressure on the MPC to raise interest rates too early," he says.

"The UK recovery is still fragile and the more forceful implementation of the government’s austerity plan will inevitably have negative effects on business cash flows and consumer disposable incomes," he adds.

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