The Bank of England's Monetary Policy Committee kept interest rates at a record low 0.5 per cent today, in an almost universally expected decision that likely reflects policymakers' concerns about the growth outlook.
All 61 economists polled by Reuters last week expected the central bank to keep rates on hold, and the majority see no rate rise this year despite last month's surprise decision by one policymaker to vote for rates to rise to 0.75 per cent.
Although consumer price inflation of 3.4 per cent is well above the BoE's 2 per cent target, it has started to fall from the 17-month high of 3.7 per cent set in April. Many of the factors that had pushed it higher -- such as rising oil prices and weaker sterling -- have gone into reverse in the past month.
Moreover, policymakers also expect at least some downward pressure on inflation from spare capacity in the economy, as Britain recovers from its deepest recession since at least World War Two, and output remains well below the peak hit in 2008.
Future growth is also likely to be slowed by a planned 25 per cent cut in the spending of most government departments over the next five years, as well as similar austerity measures in many of Britain's euro zone export markets.
The Bank's updated quarterly inflation forecasts in August will provide a further spur for debate, as they will factor in the budget measures and an upcoming rise in value-added tax.
Industrial output data released earlier today showed the strongest annual growth in almost a decade as manufacturers bounced back from recession, but economists warned that this rate of growth was not sustainable
The BoE has held interest rates at 0.5 per cent since the depths of the recession in March 2009, and as usual made no statement alongside its rate decision. A voting breakdown will only be available when the MPC minutes are published on July 21st.
The BoE made no change to the €200 billion of assets, mostly British government bonds, purchased with newly-created money under its quantitative easing scheme between March 2009 and February 2010.
BoE governor Mervyn King said last month that the central bank would raise interest rates before it sold these assets.
Nonetheless, policymakers are not totally relaxed about higher inflation.
One MPC member, Andrew Sentance, had already voted to raise rates in June due to concerns about persistently above-target inflation.
His colleague Adam Posen said last week that public inflation expectations were edging up -- though not by enough for him to discount the countervailing risk of recession
Minutes of June's MPC meeting showed a group of policymakers other than Sentance had doubts -- which Mr King does not appear to share -- about how much of a downward impact on inflation economic spare capacity will have.
Reuters