Bank of England set to keep rates on hold

The Bank of England is expected to keep UK interest rates at their record low of 0.5% today despite high inflation which is piling misery onto cash-strapped households.

Bank of England set to keep rates on hold

The Bank of England is expected to keep UK interest rates at their record low of 0.5% today despite high inflation which is piling misery onto cash-strapped households.

A rise in interest rates would help to bring down the consumer prices index (CPI) measure of inflation, which has hit 4.5% in recent months - more than double the Bank's 2% target.

Inflation has been driven higher by the soaring price of essential items such as food and fuel, squeezing household budgets as wages fail to keep pace with the rising cost of living.

But the Bank's Monetary Policy Committee (MPC) is expected to leave interest rates on hold for their 28th month in a row because of increasing fears over the strength of the UK's economic recovery. Many economists now do not expect a rise in rates until 2012.

There have been more worrying signs for the economy in recent months, following weak manufacturing and services sector data, which means many economists expect GDP to have grown by just 0.3% in the second quarter.

One of the main worries for the MPC is the decline in consumer spending, as nervous households delay all but essential purchases because they fear for their jobs amid the faltering economy and Government cut-backs.

This has led to tough conditions on the high street, with numerous retailers collapsing into administration in recent weeks, including homeware chain Habitat, fashion retailer Jane Norman and department store TJ Hughes.

There have also been signs of increasing inflation after Scottish Power announced a 19% hike in gas prices and the British Retail Consortium said food price inflation rose to 5.7% in June - its highest rate for more than two and a half years.

At the last meeting of the nine-strong committee, the number of members voting for a hike in interest rates dropped to two from three after Andrew Sentance, who had consistently voted for a rise, was replaced by Ben Broadbent, who sided with the no-change camp.

But even the members who voted for a hike admitted that recent economic data had been weak and there was renewed talk about the economy needing to be boosted by a second round of quantitative easing.

Vicky Redwood, senior UK economist at Capital Economics, said: "We are still sticking with our view that interest rates are unlikely to rise until 2013 at the earliest.

"What's more, an additional round of asset purchases is now looking a bit more likely."

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