MercoPress. South Atlantic News Agency

In spite of inflation, Bank of England leaves interest rates at record low 0.5%

Mervyn Allister King, governor Bank of England

UK interest rates have been held again at their record low of 0.5% by the Bank of England's Monetary Policy Committee. There has now been no change to the Bank rate for two years, despite the fact that inflation is currently twice the Bank's target rate.

But there had been some speculation that rates could change in March after three MPC members voted for a rise in February. No new quantitative easing measures were unveiled either. The Bank has faced a dilemma over what to do on interest rates.

Raising rates slows down inflation - and it is the Bank's job to keep inflation in check. But it also increases the cost of borrowing and there are concerns this may tip the UK back into recession, especially after the shock 0.6% contraction in the economy seen in the last quarter of 2010.

“MPC members continue to have widely divergent expectations about the outlook for inflation, so this decision comes as no surprise,” Ian McCafferty, CBI chief economic adviser, said.

“The short-term data continue to cloud the issue, but there are growing risks of inflation becoming more ingrained as firms attempt to bolster their profit margins and employees seek higher wage rises in the face of sharply increased costs of energy and commodities.”

Consumer price inflation currently stands at 4%, well above the Bank's target of 2%.

As well as the VAT increase, the rate of inflation has also been pushed up by oil prices, which have risen amid concerns about political unrest in the Middle East and North Africa.

The British Chambers of Commerce (BCC) welcomed the central bank's decision to leave rates on hold but said that ongoing speculation over interest rates could harm business.

“While the MPC cannot forecast its future actions, the way it currently communicates can create uncertainty,” said David Kern, chief economist at the BCC. ”The MPC must address this in order to give businesses and market analysts a greater degree of predictability”.