Caution urged on interest rates

BANK of England policymakers will this week brush aside inflationary fears and hold interest rates at their historic low of just 0.5 per cent.

The expected freeze, which will delight mortgage payers but frustrate savers, comes as business leaders today reiterated their plea for the central bank to "act with caution".

Citing last week's downbeat economic data, the British Chambers of Commerce (BCC) said there were "strong arguments for postponing a rise in interest rates".

Economists are divided over whether borrowing costs will rise at all this year, though some still anticipate a hike by the end of the summer.

On Friday it emerged that Britain's services sector grew at its slowest pace for three months in May, stoking worries that the economy's sluggish start to the year has persisted into the second quarter.

Meanwhile, official figures revealed new construction orders suffered their biggest fall since 1987 in the first three months of 2011. David Kern, chief economist at the BCC, said: "At a time when growth is slow, and with the government's austerity measures starting to bite, early increases in interest rates will undoubtedly put the recovery at risk."

Howard Archer, chief UK economist at IHS Global Insight, said: "Latest growth and inflation developments seem to have only intensified the problems that the Bank of England currently faces."