BoE holds rates at record low

The Bank of England held interest rates at a record low 0.5 per cent today despite a surge in inflation. The move contrasts with the European Central Bank which raised borrowing costs this afternoon.

A majority of BoE policymakers continued to judge the economic recovery too shaky for now to withstand higher rates, betting that inflation of 4.4 per cent - more than double the target - will ease once oil and food prices come down.

"Serious concerns and uncertainties over the growth outlook deterred the MPC from acting despite the pressure for higher interest rates ... from elevated and still rising consumer price inflation," said IHS Global Insight economist Howard Archer.

Meanwhile the ECB, dealing with a smaller inflation problem, imposed the first rate increase in three years today, of 25 basis points to 1.25 per cent.

There was scant market reaction to the BoE decision, as all but one of 67 economists polled had expected it to leave its key rate at 0.5 per cent, where it has been since March 2009.

However, economists are much more split on whether the BoE will raise interest rates in May, with markets also nearly evenly split on the chance of a 25 basis point rate rise.

Wavering policymakers have indicated that first-quarter GDP data due at the end of April will be key in helping them judge whether underlying economic growth has recovered after a shock contraction at the end of 2010, due only in part to heavy snow.

"News since the March meeting has generally supported the view that the acute weakness in quarter four was a 'one-off' but has not been conclusive in this regard," said Nomura economist Philip Rush, who predicts a May rate rise.

Last month the BoE's rate-setting Monetary Policy Committee was split 6-3 against raising rates, and said that a rise in oil prices, fanned by tension in the Middle East and North Africa, had increased risks to growth as well as inflation.

Minutes to the April MPC meeting will be published on April 20th, giving the vote breakdown for today's decision and policymakers' reasoning.

"We do not expect there to have been any further changes in the vote split at the April meeting and expect a similar cautiously hawkish tone to be maintained," Mr Rush said.

Reuters