Call for Bank to act to end 'damaging' interest rate speculation

Although the British Chambers of Commerce welcomed the decision to hold the rate and keep the quantitative easing programme unchanged, it questioned the way the monetary policy committee (MPC) communicates its decisions and the lack of visibility provided.

David Kern, the organisation's chief economist, said : "While the MPC cannot forecast its future actions, the way it currently communicates can create uncertainty. The MPC must address this in order to give businesses and market analysts a greater degree of predictability."

It is two years since the rate was lowered to the current level, but commentators believe an increase is likely, with further pressure coming from yesterday's UK manufacturing figures which showed 6.8 per cent growth in January, the fastest annual increase in 16 years.

Data from the US yesterday also showed that a strong flow of imports pushed up America's trade deficit in January, a further sign of strengthening demand there.

Despite surging inflation in the UK with the full impact of the public sector cuts still to be seen, many economists argue an imminent rise could be counter-productive.

Ian McCafferty, chief economic adviser at the CBI, said the no-change decision was unsurprising but admitted an increase in rates was becoming more likely.

He said: "The short-term data continues to cloud the issue, but there are growing risks of inflation becoming more ingrained as firms attempt to bolster their profit margins and employees seek higher wage rises in the face of sharply-increased costs."

Howard Archer at Global Insight said : "The majority of MPC members likely decided higher interest rates were an extra handicap that the economy could do without for now at least. The key question is will this be a temporary reprieve or will the Bank of England hold fire for some time to come? This remains a very hard call to make."

Stephen Boyle, head of RBS Group Economics, said it was clear that "the era of ultra-loose monetary policy is drawing to a close. "It remains to be seen whether the first hike comes in May, as markets expect, or August," he added.

The debate among the nine-strong MPC was likely to have been heated as new pressures on inflation emerged and recent voting evidence showed an increase in the number of policymakers backing a hike.The borrowing rate was last changed in March 2009 but the CPI measure of inflation rose to 4 per in January- well above the Bank's 2 per cent medium-term target - and governor Mervyn King has warned it could hit 5 per cent before retreating.

Elsewhere in Europe yesterday, Moody's downgraded Spain's sovereign debt rating and warned of further cuts to come as it expects bank restructuring will cost more than twice what the government expects. But Germany confirmed that it was ahead of its own targets for debt reduction thanks to stronger-than-expected economic growth. However, exports fell 1 per cent in January.