No change in UK rates

UK interest rates have been kept on hold at 3.5% following the Bank of England's latest rate-setting meeting.

The move had been widely expected following recent data which suggested the UK economy is beginning to pick up.

Figures out this week have shown renewed strength in both the service sector and the housing market.

Last month, the Bank sprang a surprise by cutting UK rates by a quarter of a percentage point to 3.5% - their lowest level since January 1955.

Reaction

Industry representatives said the Bank's rate-setting body - the Monetary Policy Committee (MPC) - had made the right decision.

Business will look to (the Bank) to monitor the global situation and be prepared to cut again Doug Godden, CBI

"The Bank is right to take the breathing space afforded by last month's cut and assess how the economy develops through the autumn," said Steve Radley, chief economist at the Engineering Employers' Federation.

"There are tentative signs that the global economy is beginning to show signs of life and manufacturers will hope that this is translated into stronger demand in the second half of the year."

But the CBI warned that the Bank needed to keep a close eye on the economy.

"Interest rates appear to be set at the appropriate level for now," said Doug Godden at the CBI.

"However, business will look to the MPC to monitor the global situation and be prepared to cut again if the situation warrants it."

Rebound

Last month, the MPC cited two main reasons - the hesitant global recovery and signs of slowing consumer demand in the UK - for its surprise cut.

The hot weather has boosted sales

But since then US figures have hinted that it is no longer in danger of a 'double dip' recession.

And in the UK, retail sales rebounded in June as shoppers rushed to buy barbecues and light clothing amid the hot summer temperatures.

Consumers have also been piling on record amounts of debt, helped by the low levels of interest rates.

Earlier this week, new data showed the UK's service sector rebounding and even signs of a pick-up in the struggling manufacturing sector.

The latest Halifax house price survey showed the cost of property rose by 1.3% in July and by 19.2% on a year ago.

Shop prices fall

Despite signs of a pick up in consumer spending, there are still few indications that inflation is set to rise.

Earlier on Thursday, the British Retail Consortium (BRC) said that UK High Street prices fell 1.1% in July from the previous month, although they were up 0.5% on a year ago.

The BRC's director general Bill Moyes said that over the year shop prices have risen well below the general inflation rate.

"The Monetary Policy Committee can relax. Consumer spending is not generating inflation," he said.

In June, the underlying rate of inflation, which excludes mortgage interest payments, fell to 2.8% from 2.9% in May.

This is above the MPC's target rate of 2.5%, although the rate is allowed to over or undershoot the target by one percentage point.