Interest rates held at 0.5 per cent

Rate-setters held back from further aid for the economy today as the Bank of England paused for breath in its battle against recession.

The Monetary Policy Committee (MPC) held interest rates at their 0.5% record low, with no increases in its £125 billion programme to boost the money supply after its two-day meeting.

"The scale of the programme will be kept under review," the Bank said.
The move could signal the Bank is in "wait and see" mode as it judges the strength of possible green shoots in the economy, following better news from many industry surveys and the housing market.

Interest rates have plummeted from 5% last October and the Bank has embarked on so-called quantitative easing (QE) – effectively printing money – in unprecedented efforts to get the economy moving.

At the Bank's last inflation report, Governor Mervyn King said there were some "promising signs" but warned of a "relatively slow and protracted" recovery for the economy.

Rate-setters have also hinted that further stimulus may be necessary and they have permission from Chancellor Alistair Darling to create another £25 billion under QE if needed – to a £150 billion initial limit.

Ian McCafferty, chief economic adviser to the CBI business group, said: "There are some encouraging, if tentative, signs that the QE programme is reducing the downside risk to the economy, but monetary and lending conditions remain fragile.

"The Bank is likely to need to continue to use the QE tool in coming months."

Today's decision came as the MPC assessed a raft of conflicting data to weigh up the sustainability of any early signs of recovery.

Survey data from the UK's powerhouse services sector yesterday signalled growth returning after more than a year of declining output.

This came after more upbeat signs from the manufacturing and construction sector, with decline rates easing off.

There has also been cheer from the housing market, with house price figures from the Halifax today showing a 2.6% jump in prices during May – the biggest monthly rise since October 2002.

Nationwide also reported rising prices in May – the second rise in three months for the society's index.

But there have been more pessimistic signs, including figures released earlier this week showing lending to businesses had fallen by nearly £5 billion during April.

This has cast early doubt over how successful the QE programme has been so far.

Meanwhile mortgage lending slumped to an eight-year low of just £2.7 billion during April – the lowest figure since March 2001 – according to the British Bankers' Association.

ING Bank economist James Knightley said it was "important not to get too carried away" with early signs of green shoots.

"There are ongoing risks to the recovery story with unemployment still surging, profits plunging and credit growth at or around zero," he said.

The Bank of England is charged with keeping inflation at 2% and its benchmark, the Consumer Prices Index (CPI), slid to 2.3% from 2.9% in April.

The MPC expects CPI to fall well below the 2% target later this year, but will also be wary of the deflationary impact of the pound's recent strength, which could act as a further drag.

Some experts had predicted a further QE boost today because the Bank's own forecasts see CPI undershooting the 2% target even with rates at 0.5% and an extra £125 billion of monetary stimulus already helping the economy.