Bank of England holds rates at 0.5%

The Bank of England’s rate setting committee has voted to hold interest rates at the historic low of 0.5% for the 15th month in a row.

The Monetary Policy Committee also decided against any change to its £200 billion programme to boost the money supply.

The wait-and-see attitude did not come as a surprise with all 61 analysts polled by Reuters having expected no change to rates. In the face of threats from the European debt crisis and the fallout from the spending cuts needed to reduce the UK’s budget deficit, the Bank is fearful of stalling the fragile economic recovery.

The rate committee will want to wait for more detail on how the coalition government plans to cut the deficit before it raises interest rates. Chancellor George Osborne is expected to announce harsh austerity measures in the 22 June Budget.

Conversely, the Bank must keep a tight control on inflation. Consumer inflation has climbed to 3.7%, nearly double the Bank of England’s official target rate of 2%, while retail price inflation, which includes housing costs, has reached 5.3%.

The Organisation for Economic Cooperation and Development recently warned that the Bank needs to start to hiking interest rates by the end of the summer and raise them to 3.5% within 18 months if it wants to avoid a more damaging crisis in the meantime.  

Others do not expect such rapid action to raise interest rates, meaning that savers will continue to suffer poor returns on their investments.