Interest rates held as economic recovery remains fragile

The Bank of England left interest rates unchanged today for the 16th consecutive month, as Britain's recovery from recession remains fragile amid the biggest public spending squeeze since the second world war. The Bank's base rate has been at a record low of 0.5% since last March. The monetary policy committee also left its £200bn quantatitive easing (QE) programme unchanged at the end of its two-day meeting today. The European Central Bank also left interest rates on hold. The pound has been on the back foot again today, falling back below €1.20 against the euro. The International Monetary Fund announced this morning that it had revised down its forecasts for UK growth this year and next, and weaker economic surveys have sparked fresh talk of a possible double dip recession. City economists will have to wait to see how the committee voted, which will be revealed when the minutes of this month's meeting are published two weeks from now. Last month Andrew Sentance broke ranks with his seven colleagues on the MPC and became the first member of the committee to vote for higher rates for almost two years when he backed a quarter-point increase in the Bank rate. He is thought to have done so again today, as he indicated in a recent interview with Reuters that the emergency budget had not changed his view of the economy's prospects. "It is therefore likely that the committee was split once again," said Philip Shaw, chief economist at Investec. But the rest of the committee probably wanted to wait for the latest economic forecasts, due in August, which will factor in the government's austerity measures, before making any changes to interest rates. Inflation is running at 3.4%, far above the Bank's 2% target, although it has started falling back. Many economists do not expect any changes to rates this year and some even think the Bank could start pumping more money into the economy again through its asset purchase scheme. Stephen Boyle, head of RBS group economics, said: "The stickiness of UK inflation remains a concern, but lower for longer is likely to remain the theme when it comes to interest rates. Fiscal austerity measures mean that monetary policy will have to do most of the heavy lifting if the recovery, already fragile, is to be kept on track." Roger Bootle, economic adviser at Deloitte, agreed. "Raising rates now, just when the fiscal squeeze is starting to hit and inflation is about to start falling, would be entirely the wrong thing to do. "I can see why the MPC is getting nevous. Inflation is still well above target and there are signs that inflation expectations are rising in response. But there has also been plenty of comforting news on the inflation front ... Mervyn King has already hinted that monetary policy could loosen further in order to compensate for the fiscal squeeze and I think that's exactly what should happen. I expect to see the Bank's quantitative easing programme started up again later this year." This week the Treasury appointed Martin Weale , the director of the National Institute of Economic and Social Research, a respected thinktank, to the MPC. He will replace Kate Barker, who finished a nine-year stint on the rate-setting committee at the end of May. The appointment was seen in the City as providing Bank governor Mervyn King with support for his low interest rate policy. Weale will take up his new position next month.