UK interest rates kept on hold at 0.5%

The Bank has kept interest rates at 0.5% to aid the recovery

The Bank of England has kept interest rates at a record low of 0.5% for the 12th consecutive month.

The decision was widely expected by economists, who believe that any rise in the cost of borrowing could damage the UK's fragile economic recovery.

Also as expected, the bank has not pumped any more money into the economy under its quantitative easing (QE) programme - for now at least.

Last month the Bank halted QE, having spent £200bn to boost the economy.

'Mixed picture'

Figures released last week showed that the UK economy grew by 0.3% in the final three months of 2009, compared with an initial estimate of 0.1% growth.

But although the 0.3% growth in the final quarter of 2009 was stronger than previously thought, the Bank believes that continued economic growth is not yet guaranteed.

The October to December period was the first quarter of growth following six consecutive quarters of economic decline - the longest period since comparable figures were first recorded in 1955.

Lee Hopley, chief economist at the EEF engineering employers' group, said the Bank's Monetary Policy Committee (MPC) had little choice given the "mixed economic picture".

"An unchanged position at this point is the right one given the ongoing uncertainty about the strength of the recovery, with the reality that any moves could be on hold for some months to come," he said.

David Kern, chief economist at the British Chambers of Commerce, said it would be wrong to contemplate raising rates.

"Despite the upward revision to GDP in the fourth quarter of last year, the economy remains weak and fragile. Businesses are still under serious pressure and there is no room for complacency," he said.

"Threats of a double-dip recession are unquestionably more serious in the near future than risks of higher inflation,"

Inflationary pressure

Under QE, the Bank has bought assets in order to boost lending to businesses and individuals by commercial banks.

Capital Economics' senior economist Vicky Redwood said that without QE the UK could still be in recession, although the policy has not worked well enough to kick-start a strong recovery.

"We doubt that the £200bn undertaken so far will be enough to ensure a strong and sustained economic recovery. We still think that the MPC will have to take further action."

But the Bank has said that the full effects of QE will take more time to filter through to the economy.

Many analysts argue that banks have not in fact increased lending as the economy begins to recover. Banks in turn argue that businesses are looking to pay down debt rather than take out new loans.

The Bank must also be wary of the inflationary pressure caused by QE.

The latest inflation figures, released last month, showed the annual inflation rate rising by 3.5% in January, the fastest annual pace for 14 months. This compares with 2.9% the previous month.

As a result, the Bank's governor, Mervyn King, had to write a letter to the chancellor explaining why prices were rising so quickly.

A letter from the governor is required if inflation is more than one percentage point above or below the government's 2% target.

However, Mr King said that the rise in inflation was temporary, and was largely the result of the rise in VAT to 17.5% in January.

The government had reduced VAT to 15% to try to boost consumer spending.