Bank of England holds interest rates at 5.0%

The Bank of England's Monetary Policy Committee today voted to maintain interest rates at 5.0%.

The previous change in Bank Rate was a reduction of 0.25 percentage points to 5.0% on 10 April.

Barry Naisbitt Chief Economist, Abbey commented: "The Bank of England held rates at 5.00% today. Market commentators had expected no change this month, reflecting a mix of factors. Last month's decision to hold rates had only one dissenting vote, and that was for a rate reduction.

"However inflation has now reached 3.3% and is expected to rise further in the coming months. The Monetary Policy Committee (MPC) has clearly signalled its concern that higher inflation may feed through into elevated inflation expectations and so into continued high inflation. But there are increasing signs of slowing output growth. So the majority of MPC members must have judged that the most recent evidence of slowing economic activity provided a balance against the inflation indicators that are high and expected to rise further.

"The MPC Minutes, which are published later this month, should give some more information on how the MPC members judged the risks in what is a highly uncertain economic situation. If the slowing in economic activity is occurring more sharply than anticipated, and supports lower inflation in the medium term, a further rate cut could still be on the cards later this year, although much will depend on how inflation develops in the coming months."

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: "The Bank of England is facing the unenviable task of having to fix two different problems with just one policy tool. The UK economy is slowing; both manufacturing and services activity are showing signs of feeling the pressure and consumer confidence is fragile. At the same time, price inflation - which is already high - is likely to rise further before it peaks.

"By holding rates, the Bank of England has made the best it can of a very difficult decision. The UK hasn't yet reached recession, but the worry is that raising rates could trigger this. Equally, not raising rates could risk even higher inflation later on. The best option is to wait until the inflation picture becomes clearer. Importantly, this means ensuring that inflation is past its peak - or risk further elevating inflation expectations - before considering in which direction rates should move next."