BoE keeps interest rates at historic low

THE Bank of England kept interest rates at a record low yesterday, reluctant to jeopardise a fragile economic recovery and hopeful the recent surge in inflation will prove temporary.

All but one of the 63 economists polled by Reuters last week had predicted rates would stay at 0.5%. But with inflation double the central bank’s 2% target and still rising, most expect a rate rise this year.

The European Central Bank, dealing with an inflation rate nearly half the level of Britain’s, has already signalled that an interest rate rise in imminent.

Three of Britain’s nine-strong Monetary Policy Committee voted to raise interest rates in February, so it would only take two to switch camps to get a majority in favour of higher rates. The minutes from yesterday’s meeting — including how the committee voted — will not be published until later this month.

“With the committee expected to begin tightening over the coming months, and a hike requiring the support of just two more members, UK markets look set to remain jittery,” said Philip Shaw, an economist at Investec.

The main argument keeping the BoE on hold is the weakness of Britain’s recovery and the fear that the government’s austerity drive will throw up stiff headwinds over the coming year.

Unlike its main trading partners, Britain’s economy lurched into reverse at the end of 2010, contracting by 0.6% in the fourth quarter.

The services sector, which accounts for three-quarters of the economy, is struggling.

The British government announced the biggest public spending cuts in a generation last year, but much of the pain will not kick in until next month.