Rates held - but odds fall on uptick

The odds are narrowing on an interest rate rise in the spring despite the Bank of England's monetary policy committee yesterday holding rates at their historic 0.5 per cent low for the 22nd consecutive month.

Inflation concerns are expected to force central bank policymakers into action in the second quarter of this year as the consumer prices index (CPI) remains well above the MPC's 2 per cent target.

The latest inflation figures are due to be published next week but November's reading hit 3.3 per cent, fuelled by rising commodity and food prices.

However, economists remain divided over how rapidly the MPC should up rates, with the Centre for Economics and Business Research (CEBR) today warning that the chances of a double dip recession have doubled since October.

The London-based think-tank believes there is a 20 per cent chance the UK economy could lurch back into recession, while it has also downgraded its growth forecast for this year from 1.3 per cent to 1.1 per cent.

Charles Davis, CEBR managing economist, said: "Looking forward, this is probably going to be the toughest year in the next economic cycle, with inflation rising initially and growth slowing sharply, with policy makers hamstrung by a loss of credibility."

The MPC has come under attack for underestimating inflation in recent months, while its members are also divided over the best course of action.

Several economists warn that inflation will only be a temporary problem and securing the recovery through continued low interest rates should be a priority. Roger Bootle, economic adviser to Deloitte, said: "Pressure is mounting on the MPC to raise interest rates.

"However, I continue to think that the rise in inflation will be temporary and believe that interest rates need to stay low."

The British Chambers of Commerce warned this week that growth is likely to have slowed substantially in the final quarter of 2010 amid particular problems in the UK's key services sector.

Scottish Chambers of Commerce chief, Liz Cameron, yesterday urged the MPC to keep rates low until the economy is on a far more stable footing.

She said: "We believe the Bank should only consider bringing interest rates back up to more normal levels once the upturn in business becomes more widely established."