Analysts forecast freeze on interest rates for 22nd month

INFLATIONARY concerns will be brushed aside this week by Bank of England policymakers as they freeze interest rates for the 22nd month in a row.

Analysts see a decision to hold borrowing costs at their record low of 0.5 per cent as an odds-on certainty.

It is also expected that the Bank's monetary policy committee will vote to hold fire on pumping more money into the economy under its programme of quantitative easing. However, inflationary pressures are mounting and more hawkish members of the MPC may consider joinng colleague Andrew Sentance, who has been the lone voice calling for a rate rise since June.

Consumer inflation was sitting at 3.3 per cent in November, the last month for which data is available - well above the central bank's 2 per cent target.

Meanwhile, the impact of this month's hike in VAT to 20 per cent has still to be felt. Rate-setters will have to weigh those worries against concerns the private sector may not be robust enough to fully counter government austerity measures.

David Owen, managing director of investment firm Jefferies International, said inflation could reach 4 per cent by the spring, but played down the chances of a rate rise in the near term.

"With inflation posted at 3.3 per cent in November, and potentially reaching 4 per cent by the spring, there appears to be more concern that the timing of the first bank rate rise is set to be brought forward," Owen said. "We are not so convinced. Above target inflation owes much to changes in VAT in the UK.

"It should not be forgotten that it was not so long ago that inflation was much higher (over 5 per cent], but the MPC was cutting rates."

Minutes of the Bank's last meeting, in December, came across as "modestly more hawkish", noted Howard Archer, chief UK economist at IHS Global Insight, the forecasting group.

Despite that, and fears of a spike in inflation, Archer said he was sticking with his view that the Bank will not start raising interest rates until the fourth quarter.

"Even if interest rates do start rising earlier than expected, the probability remains that they will rise relatively gradually and remain very low."

Ahead of Thursday's decision, the British Chambers of Commerce today renewed its call for a rate hike to be postponed "until the recovery is more secure".

David Kern, the organisation's chief economist, said: "While it is likely that interest rates will have to rise later this year, it is important for the MPC to wait until the economy has absorbed the initial impact of the fiscal austerity plan."