Interest rate increase unlikely as economy 'stagnates'

FEARS over the pace of the UK's economic recovery were fuelled yesterday after new figures showed a tepid turnaround from the snow-bound end to 2010.

Gross domestic product (GDP) - a broad measure for the total economy - grew by 0.5 per cent between January and March, reversing a shock decline of 0.5 per cent in the final quarter of 2010, the Office for National Statistics (ONS) said.

But while the UK has dodged a double-dip recession, the ONS warned underlying growth was broadly flat and the economy has made no progress since the third quarter of 2010.

Experts said the stagnant economy made an imminent interest rate hike a "tough proposition" as the Bank of England juggles soaring inflation and weak growth. But the Treasury insisted the figures were positive, despite missing the 0.8 per cent forecast by the independent tax and spending watchdog, the Office for Budget Responsibility (OBR).

Vicky Redwood, senior UK economist at Capital Economics, said: "The figures suggest that underlying activity in the economy remains pretty much stagnant."

Rob Carnell, economist at ING, said the soft figure did not provide the Bank with enough of an excuse to respond to high inflation with tighter monetary policy. "A May rate hike still seems a tough proposition at this stage," he added.