Page last updated at 11:56 GMT, Thursday, 4 June 2009 12:56 UK

Interest rates remain unchanged

Graph

The Bank of England's interest rate setters have kept the cost of borrowing unchanged at 0.5% for the third month in a row.

The Bank did not announce any fresh measures to stimulate the economy.

Last month, the Bank of England announced it would be injecting an extra £50bn into the economy as part of its quantitative easing policy.

Policymakers are trying to gauge how the economy is faring amid tentative signs of a recovery.

A closely-watched survey on the service sector released earlier this week suggested that the recovery may be coming faster than expected.

Tackling the recession must remain the priority
David Kern, British Chambers of Commerce

And UK house prices rose by 2.6% in May compared with April, the fastest rate of growth since 2002, according to the latest survey by the Halifax.

But in its latest Inflation Report, the Bank of England warned that the economic outlook was still very uncertain.

Financial markets showed little reaction to the decision, with the pound edging slightly higher and the FTSE 100 index of the UK's top shares barely changed.

The European Central Bank also decided to keep interest rates unchanged at 1%.

Caution needed

Business groups have called on the central bank to increase its £125bn quantitative easing scheme, which aims to expand the amount of money circulating in the economy.

"The positive mood in the financial markets should not lull anyone into a false sense of security," said David Kern, chief economist at the British Chambers of Commerce.

I think that monetary policy will remain exceptionally loose for a prolonged period
Roger Bootle, economic adviser to Deloitte

"Tackling the recession must remain the priority, especially with unemployment rising and firms continuing to slash investment," he added.

The Bank is due to complete its £125bn spending on quantitative easing in July and the the Treasury has said it can spend up to £150bn.

Under the programme, the Bank of England prints money and uses it to buy government and corporate bonds to increase money supply and stimulate the economy.

"It's still possible that the committee may decide to spend more - despite the good news this week, money and credit growth is not yet showing signs of improvement, which could undermine the strength of any recovery," said Colin Ellis, European economist at Daiwa Securities.

Winners and losers

In the housing market, the record low interest rates seen in recent months have eased mortgage affordability for many.

The Halifax index showed that the proportion of disposable income spent on mortgage repayments by a new borrower dropped from a peak of 48% in the third quarter of 2007 to 31% in the first three months of this year.

However, the recent falls in interest rates have led to a sharp drop in the level of interest being paid on savings.

The average interest rate from instant access savings accounts in the UK, including current accounts, is now 0.16% compared with 2.77% at the end of January 2008.

Despite talk of an economic recovery, many economists expect interest rates to remain low for this year and much of 2010.

"I think that monetary policy will remain exceptionally loose for a prolonged period," said Roger Bootle, economic adviser to consultants Deloitte.



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