Bank of England defies inflation fear to hold rates at 0.5%

BANK of England rate-setters yesterday resisted calls to tighten monetary policy despite renewed inflation fears and a widening gap with their European counterparts.

Economists said a rise in UK interest rates was unlikely before the end of the year as the central bank's monetary policy committee voted to hold borrowing costs at their record low of 0.5 per cent for the 28th month in a row. The Bank also held its quantitative easing programme at 200 billion.

Consumer inflation has soared to 4.5 per cent in recent months - more than double the Bank's 2 per cent target - driven higher by the rising cost of essential items such as food and fuel.

But MPC members appear to be more concerned about the strength of the economic recovery amid fresh signs that growth in the manufacturing and services sectors has slowed since the first quarter of 2011.

Ian McCafferty, the CBI's chief economic adviser, said the Bank of England had been left in a "difficult position" following "mixed messages" in recent surveys.

"Inflation expectations are on the rise, raising questions about the Bank's anti-inflation credibility, but activity continues to be patchy," he said.

"This fine balance will continue. But with inflation likely to rise to 5 per cent by the autumn, and the economy still gradually recovering, a shift in policy should not be ruled out before the end of the year."

The MPC's no-change stance contrasted yesterday with the European Central Bank, which raised eurozone interest rates by 0.25 per cent to 1.5 per cent as it took a hard line on inflation. It was the second such move this year.