Bank set to keep rates at 5.25%

The Bank of England faces slowing growth while prices rise

The Bank of England's rate-setting committee is forecast to keep interest rates at 5.25% later on Thursday, amid growing signs of inflation.

Most analysts are expecting rates to stay on hold after the central bank reduced rates in February by a quarter of a percentage point from 5.5%.

The bank faces the twin threat of a cooling economy while prices rise.

Data showing that that prices firms are paying and charging have risen has increased worries over inflation.

The Bank is set to announce its decision at noon.

Tight lending

Figures released on Wednesday showed strong new service sector growth in addition to rising costs, according to a monthly index from the Chartered Institute of Purchasing & Supply (CIPS).

"These indicators seriously challenge the case for more aggressive interest rate easing at this stage," said Alan Clarke, UK economist at BNP Paribas.

The Bank of England's inflation report in February hinted that the scope for interest rate cuts was limited because of the need to keep inflation in check.

Food and energy prices keep rising and look set to increase further, thereby fuelling inflationary pressures.

Vicky Redwood of Capital Economics said: "The combination of faster growth and stronger price pressures shown in February's [Bank of England] report undoubtedly supports the case for the Monetary Policy Committee (MPC) to be cautious about how quickly it cuts interest rates."

All the members of the bank's MPC, which sets rates, voted for a cut at the previous meeting in February.

MPC member David Blanchflower had favoured an even greater cut of half a percentage point, rather than the quarter point cut that came into effect.

With banks facing higher costs and finding it harder to access credit, individuals are also seeing difficulties in getting access to mortgages.

"Corporates are suffering too," said Jonathan Loynes, head economist at Capital Economics.

"Not only have banks tightened their lending conditions for companies, but the cost of raising funds in the capital markets has begun to rise too," he added.