Bank to keep interest rates on hold despite inflation

INTEREST rates are expected to be maintained at their record low of 0.5 per cent this week despite inflation riding at a 17-month high.

The Bank of England is likely to resist pressure to tackle the consumer prices index (CPI), which at 3.7 per cent is almost double the Monetary Policy Committee's 2 per cent target.

Last month the respected Paris-based Organisation for Economic Co-operation and Development (OECD) urged the bank to begin raising rates to "more normal levels" from the summer.

The think tank said borrowing costs should be raised "no later than the last quarter of 2010", while it would like to see interest rates of 3.5 per cent by the end of 2011.

However, the OECD's forecast met opposition from business groups in the UK, in particular the British Chambers of Commerce (BCC), which argues that the MPC would put the fragile recovery at risk if it were to hike rates too early.

David Kern, chief economist at the BCC, urged the bank to proceed with caution.

"In view of the dangers still facing the economy, the MPC must persevere with expansionary policies. Any thought of raising interest rates will merely heighten the risk of a major setback, and must be rejected until the recovery is more secure," Kern said.

"Despite some welcome signs of improvement in the economy, growth remains modest and fragile, and businesses still face serious obstacles. The threat of a double-dip recession is particularly acute."